Take a Look at Munis

March 17, 2008
Special Feature

With stocks in free-fall, many physician-investors are looking for safer havens and many are choosing US Treasury bonds and notes. But heavy buying has caused an increase in bond prices, which has caused yields, which move in the opposite direction, to sink to new lows. If you're looking for investment income, you may be better off with tax-free municipal bonds.

“Muni bonds have been and continue to be safe investments. Defaults are rare, and even in cases of default, investors typically get their money back.”

—Matt Krantz, author of Investing Online for Dummies

With stocks in free-fall, many physician-investors are looking for safer havens and many are choosing US Treasury bonds and notes. But heavy buying has caused an increase in bond prices, which has caused yields, which move in the opposite direction, to sink to new lows. If you’re looking for investment income, you may be better off with tax-free municipal bonds. The average yield on 10-year, AAA-rated munis is now hovering around 4%, better than the taxable 3.35% you currently get on a 10-year US Treasury Bond.

The tax-free feature of munis makes them even more attractive. For a taxpayer in the 28% bracket, a 4% yield on a tax-free muni is the equivalent of a 5.56% yield on a taxable security. When shopping for munis, remember that general obligation (GO) bonds are generally safer, because they are backed by the taxing power of the issuer. Revenue bonds, on the other hand, are riskier because they’re used for a specific public works project, like a sewage plant, and depend on the project’s income to pay off investors. Also part of the income from some revenue munis may be subject to the alternative minimum tax.

For more information on municipal bond investing (and for good info on bond investing in general) visit Investing in Bonds.

60%

Percentage of total Wall Street revenues that come from investment trading.

(Fortune, 2008)