David Blair, a veteran bond-portfolio manager with First Eagle Investments, sees ‘incredible value’ in the tax-exempt municipal space right now This is a very good moment for you to look into tax-exempt bonds if you are investing for income. The relationship between yields on municipal bonds and fully taxable bonds is dynamic. The scene is completely different from what it was only two months ago, and the good times may last for a little while longer, perhaps through November.
David Blair, a bond-portfolio manager at First Eagle Investments in New York with experience in leadership roles at Nuveen and Pimco, called the increase in yields for tax-exempt municipal bonds “one of the bigger moves in the market we have seen over the past decade.” To illustrate this point, we can compare the yields of two investment-grade bond indexes. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates.
I can unsubscribe at any time. The Bloomberg Municipal Bond Index has a yield to worst of 4.40%, while the Bloomberg U.S. Aggregate Index of corporate bonds has a yield to worst of 5.28%.
Bond yields reflect the current market prices of what the capital gains or losses will be when the bonds are redeemed at face value. Definitions of bond terms are further down in this article. Since the bonds in the Bloomberg Municipal Bond Index pay interest that is exempt from federal income taxes, we need to do a simple calculation to compare the yields of the two indexes.
For the first example, we will use the 24% federal income-tax rate, which applies to individuals with annual taxable income from $105,701 to $201,775 and to married couples filing jointly with income ranging from $211,401 to $403,550. If we divide the 4.40% tax-exempt yield by 0.76 (1 minus 0.24), we have a taxable-equivalent yield of 5.79%, which is 51 basis points (0.51 percentage points) higher than the taxable yield of 5.28%. If we had done the same calculation with the two bond indexes’ yields on July 13, the comparison would have been unfavorable for tax-exempt bonds.
On that day, the Bloomberg Municipal Bond Index had a yield to worst of 3.67%, for a taxable-equivalent yield (based on the 24% federal bracket) of 4.83%. That was 8 basis points lower than the yield of 4.91% for the Bloomberg U.S. Aggregate Index that day.
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