X

Muni Bonds: Safe Haven Investing

One alternative to government bonds that have been extremely popular during these tumultuous times have been municipal bonds. Unlike Treasuries, all the interest you earn from municipal bonds is federally tax   free. But the pandemic has made munis trickier to buy than usual because of the toll the virus has taken on state and local finances. So when does it make sense to buy munis today?  Let’s take a look at the role munis can play in your portfolio.

When you buy a municipal bond or bond fund, you’re actually lending money to a state or local government to fund its operations or a special project such as a school, road or sewer system. The money to pay that bond back comes from taxes on the citizens or from revenues generated by that project, such as tolls. As an individual investor, you never have to pay federal income taxes on the interest you earn from municipal bonds. If you buy bonds from the state or city where you are a resident, you don’t have to pay taxes on that interest either. That makes those in state bonds either double or triple tax free. The higher your tax bracket, the more tax you avoid by buying munis, so the more sense they make compared to taxable Treasuries or corporate bonds.

High quality long term munis today pay in the 2 to 3 percent range which is much higher than the 1 percent or less being paid by Treasuries. In normal times, the default rate on munis is extremely small, typically about 1% or less, because governments want to maintain good credit ratings so they can issue more bonds. But that security has come into question recently because state and local governments are running such big deficits. The coronavirus shutdown has dramatically reduced sales tax, recreational fee income and other sources of revenue. Meanwhile, expenses have shot up dramatically because of higher unemployment costs, health care costs and overtime. Municipalities have gotten some money from the federal government, but not nearly to enough to bridge the gap. Many cities and towns have responded by laying off police, firemen and teachers.  So far, there have not been any municipal defaults because of these financial pressures. But there is no guarantee that defaults won’t rise if this situation continues for a long time.

There is one simple solution if you still want to invest in muni bonds for that tax free income. That’s to buy bonds or bond funds that are insured against default. There are two major muni insurers–Assured Guaranty and Build America Mutual. They guarantee that you will get all interest and principal as due even if the underlying issuer does not pay it. You can buy an individual municipal bond that says in its name insured by AG or BAM, typically for a minimum of $25,000. For a list of some of the bigger insured muni bonds, look up the components of the Merrill Lynch Insured National Municipal Bond Portfolio. An easier way to buy a basket of insured bonds is through a mutual fund or exchange traded fund. For example, the IQ MacKay Shields Municipal Insured ETF, symbol MMIN, currently pays a yield of about 2.8% tax free. So now may be a good time to earn some significant tax free income from municipals. But if you’d like the belt and suspenders approach, it might make sense to try some insured bonds or bond funds so you don’t have to worry about defaults.

Looking for an Answer?

Resource Center

Featured on

  • "On behalf of all of us at Organon, I want to thank you for participating in the Experts in Reproductive Medicine Meeting. Your financial planning sessions were so informative. We received wonderful feedback and a great interest in learning more about business finance as well. I know that there were quite a few physicians you were able to spend time with throughout the weekend. Many of them conveyed their appreciation for all of the help and advice you extended them. We are so appreciative and cannot thank you enough for such a great job!"

    Cathy R. Termini

    R.PH Organon Inc.

  • "Where do I begin? You were excellent at the OSC Power Meeting XXIV recently held in St. Pete Beach, Florida. The speaker evaluations proved that you were a huge hit with our members. QSC members are much better off, both personally and professionally, for having attended your program. I might add that we have never had as many requests for the recording of a presentation as we have with yours. Don’t ever hesitate to have any prospective clients contact me as a reference. Thank you again for such a positive experience."

    Charles E. Wallace, III

    Executive Director/Quality Service Contractors

  • "There is always an exception to every rule and your recent seminar to our JWT employees provided that. Generally, I believe you get what you pay for and since we didn’t pay you anything for your recent talk one might not expect the reaction we got. Instead, I have been besieged with compliments about arranging for you to speak. Our employees felt more informed and financially empowered as a result of your discussion with them. I enjoyed meeting you and will be pleased to know the face behind the column that I read in every issue of Money Magazine."

    Jeff White

    Executive VP/General Manager/J. Walter Thompson

  • "On behalf of the Water Systems Council I would like to thank you for speaking at our Spring Meeting in Washington, DC on March 3rd. Your presentation was very well received by our members. The information in your presentation and additional reference materials you provided were both fascinating and timely. We hope you enjoyed meeting our members. Thank you again for taking the time to speak at our meeting."

    Kathleen M. Stanley

    Executive Director/Water Systems Council

  • "The crowd was small, but the quality of your presentation was superb, addressing precisely the areas which I had hoped you would cover. It obviously had a high-interest impact upon the participants. And – it is the kind of expert contribution which makes for a successful meeting. Thank you immensely! And – thank you again for joining us at the Club!"

    Lewis O. Kerwood

    National Society for Real Estate Finance

  • "On behalf of the Take Charge America Institute, the University of Arizona Students in Free Enterprise and their Credit Wise Cats team, I would like to extend my appreciation for your wonderful keynote address last week. Our three-day symposium, “Money Talks, Think you Know? Think Again!” was a great success, largely due to the relevance of your opening statements."

    Marica Klipsch

    Education Coordinator/University of Arizona

  • "Your presentation certainly contributed to the overall success of the event. I sat in on your presentation, “Earning Fast Profits in Hard Times”, and found your presentation to be insightful, educational and thought-provoking and the topic was certainly timely. My opinion of your presentation was confirmed by feedback I received from event attendees. It was a pleasure to have you at our event and it is without reservation that I would recommend your presentation skills to anyone interested in having you speak. I look forward to working with you again."

    Michael P. Scott

    VP/Director of Business Development Pensco Trust Company

  • "... Here are some statistics we received from the attendees: 93.38% agreed that you presented in a clear, organized, engaging manner. 94.84% agreed that the information you presented was valuable to them as business owners. 83.01% agreed that they would travel to attend a 1 or 2 day course presented by you. 83.77% agreed that they would like to see your topics brought to their local study club. 87.25% agreed that they would like to see your topics offered at a future Symposia. Thanks again for all of your awesome contributions!"

    Shaida Ghomi

    Seattle Study Club For Dentists

  • "Thank you so much for coming out last week to Las Vegas and speaking to our participants. I heard so many great things from people that attended your course about how useful the information was."

    Sheryl Dare

    Meeting Planner for Genentech Corporation

  • "... I appreciate your efforts to present meaningful content to make a successful event. Your professionalism, delivery and ability to engage with the attendees were exceptional. I know there were many attendees in the room including me who left with new ideas and insights..."

    Wendy Mathea

    Supplier Diversity Officer/Amgen

Have a question?