Municipal Bonds Offer You More Value Than Treasuries

4 Reasons To Like—or Love—Municipal Bonds (Part 3 of 3)

(Continued from Part 2)

The municipal bond market has evolved considerably over the years. It weathered major tax reform changes in 1986, and the loss of big investors in the aftermath. Between the 1990s and 2000s, it saw the rise and fall of municipal bond insurers. Five years after the 2008 credit crisis, it has completed its transition from an interest-rate-based market to one driven more by credit events. Although I doubt I’ve seen it all, I have lived and invested through enough to know that I still like what I see today. I look forward to sharing more of my views on the muni bond market on this blog.

Market Realist – Municipal bonds offer value relative to Treasuries.

The graph above compares the yield on 20-year US Treasuries (TLT) with the yield on municipal bonds (MUB), as tracked by state and local bond buyers’ 20-bond index.

The former is currently yielding around 2.2%, compared to the 3.5% of the latter. Also, the tax-free nature of municipal bonds makes them even more attractive. As you saw earlier in this series, the balance sheets of municipal bond issuers are strengthening by the day. These factors—and all others you’ve seen throughout this series—make municipal bonds even more attractive.

However, Treasuries (IEF) always demand a premium, as they’re backed by the full faith of the US government. At the moment, though, they’re looking expensive despite the recent pullback. Also, if equities (SPY)(IVV) remain volatile due to global cues, municipal bonds could be one of the few reasonable assets remaining.

Please read Market Realist’s Will the QPIBs add to the $3.6 trillion US municipal market? for more analysis of the current scenario in the municipal bond market.

Browse this series on Market Realist:

• Part 1 - Consider Municipal Bonds For A Better Fixed Income Option

• Part 2 - Municipal Bonds Provide A Cushion In Volatile Times