Municipal Bond Forum
CDs vs. tax-free bonds
Q
In today’s market, I can get a four- or five-year CD for 4.50%, AAA, with no risk and no premium. If I’m buying an A-rated muni bond, I want at least 2.5% to 3.0% above prime.
A
James A. Klotz responds:
We don’t think the comparison is valid. CDs are taxable and provide no call protection. Even if an investor is in the 28% tax bracket, the net-after-tax return on the 4.50% CD is only 3.24%. The tax-free bond net is 4.50% – 39% more after-tax income.
In the past, during periods of high short-term rates (Fed tightening), many investors were dismayed to find that when short rates started dropping, it was too late to take advantage of long-term rates, which dropped even more precipitously than short rates.
“Income Risk” is a legitimate concern during periods when the Federal Reserve is pushing up short-term interest rates.
Start here.
Do you have specific criteria for bonds you’re looking for? Let us know and we’ll e-mail you bonds that fit your needs. There is no charge for this service.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.