Taxable Munis? They’re Worth a Look
Sound describes the credit quality. But it doesn’t do justice to the stellar performance.
To herald this new decade, I decree that we quit bemoaning the Great Recession and credit crisis of 2008–09 and its many calamities. It happened, it was costly, we learned something about defaults and diversification—and it’s old news. But before we lock the door on those dark days, I offer a shout-out to one of the meltdown’s few rewarding legacies: the taxable municipal bond.
Yes, there is such a thing. A handful are general obligation bonds, issued by municipalities, but the vast majority are construction or infrastructure bonds issued and backed by a public entity. Some 15% of fresh state and local debt today pays interest subject to federal income taxes, and the yields to maturity are considerably higher than Treasuries or regular municipals—often, over 3% for 15-year bonds or 5% for 20-year debt. In 2019, taxable muni issuance spiked amid high demand, and that has carried into 2020 because of the hunt for yield and these bonds’ powerful appeal for IRAs, pension funds and foreign buyers who would gain no advantage from tax-frees anyway.
Overseas demand is often the trigger for issuers to add a smaller taxable portion to a large tax-exempt offering. After all, a 3.2%, 15-year bond rated A+ and backed by, say, an international airport’s terminal and parking revenue is an easy sell in negative-yield Europe. Taxable muni issuers have recently included the Port Authority of New York and New Jersey, the Dallas–Fort Worth airport, the Multnomah County, Ore. (Portland-area) school district, and several state college and university systems.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Sound describes the credit quality. But it doesn’t do justice to the performance of these bonds. Standard & Poor’s Taxable Municipal index has returned 12.9% over the past year, compared with 8.1% for the comparable S&P long-term tax-free index and 10.8% for the broad bond market yardstick, the Bloomberg Barclays U.S. Aggregate. Vanguard’s broadest taxable bond exchange-traded fund, BND, made 10.9%, which is sweet but not as spectacular as taxable muni returns. Lest you dismiss these munis as a one-year wonder, the 10-year annualized gain for that S&P taxable muni index is 6.5%, which beat the 5.3% from an index of bonds issued by firms in the S&P 500 index, a fair comparison of high-grade taxable issuers.
Strong fundamentals. The engines for continued impressive returns are the fundamentals, which include more-compelling yields than other taxable debt, comparable or superior credit ratings, and, as Baird municipals maven and portfolio manager Duane McAllister puts it, the security of knowing you are lending to public institutions rather than to corporations that are subject to industry cycles or laboring under high or questionable debt burdens. Recession, as always, is a risk, but where’s the recession? Not seeing it, friends.
Taxable munis also benefit from being mostly non-callable, unlike corporate bonds. Although some are slated to be refinanced on a fixed schedule, you can assume the attractively high coupon will survive 10 years or longer. Jason Audette, who manages separate municipal accounts for Appleton Partners, calls the design “a low-risk, high-income anomaly.” Though I often espouse owning individual muni bonds, there are a few of these I would reject, such as debts backed by nursing homes and minor-league baseball parks. Fund investors can consider the Invesco Taxable Municipal ETF (symbol BAB, $32), tracking the performance of a U.S. taxable muni debt index, and two closed-end funds, BlackRock Taxable Municipal Bond Trust (BBN, $24) and Nuveen Taxable Municipal Income Fund (NBB, $22). The closed-ends’ active management has given them an edge, and both are, remarkably, priced below net asset value.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Six Tax Deadlines for October 15
Tax Deadlines You might know about the federal tax return extension deadline, but did you know about these other tax deadlines for Oct. 15?
By Kate Schubel Published
-
10 Books That Taught Us About Finance Available on Amazon Prime Day
As Amazon Prime Day winds down, here are some of the best money and personal finance books you can find on Amazon, according to Kiplinger's editors and writers.
By Alexandra Twin Published
-
Smart Ways to Invest Your Money This Year
Following a red-hot run for the equities market, folks are looking for smart ways to invest this year. Stocks, bonds and CDs all have something to offer in 2024.
By Jeff Reeves Published
-
Vanguard's New International Fund Targets Dividend Growth
Investors may be skittish about buying international stocks, but this new Vanguard fund that targets stable dividend growers could ease their minds.
By Nellie S. Huang Published
-
Where To Invest Your 401(K)
Knowing where to invest your 401(k) money can be difficult. Here, we rank 10 of the largest retirement funds.
By Nellie S. Huang Published
-
7 Best Stocks to Gift Your Grandchildren
The best stocks to give your grandchildren have certain qualities in common.
By Dan Burrows Last updated
-
How to Find the Best 401(k) Investments
Many folks are likely wondering how to find the best 401(k) investments after signing up for their company's retirement plan. Here's where to get started.
By Deborah Yao Published
-
How to Master Index Investing
Index investing allows market participants to use baskets of stocks and bonds to build the best portfolio to meet their goals. Here's how it works.
By Nellie S. Huang Published
-
Bond Basics: How to Reduce the Risks
investing Bonds have risks you won't find in other types of investments. Find out how to spot risky bonds and how to avoid them.
By the editors of Kiplinger's Personal Finance Published
-
Why Investors Needn't Worry About U.S. Credit Downgrade
Fitch Ratings The United States saw its credit rating downgraded for just the second time in history, but experts aren't worried about the long-term damage to stocks.
By Dan Burrows Published