Municipal bonds today: Value, tax-advantaged yields, and low credit risk

Recent policy-driven selloffs, together with Detroit’s bankruptcy filing, have put a chill on municipal markets in recent months. Despite the negative headlines, we think municipal markets at large remain fundamentally attractive. Below are three reasons why.

  • Tax-adjusted yields remain compelling.
    Looking at the 43.4% tax bracket (the 39.6% top federal tax bracket plus the 3.8% Medicare tax), investors are currently earning a higher taxable-equivalent yield on both the 10- and 30-year maturity segments of the market versus Treasury bonds and corporate bonds of like maturities. The table below puts a finer point on this relationship.

A unique feature of municipals: Tax exemption

Muni investors are earning a taxable-equivalent yield that outpaces that of Treasurys and corporates.

                               10 year 30 year
Fixed income asset type Yield Taxable equivalent yield Yield Taxable equivalent yield
AAA muni  2.56%  4.52% 3.83%  6.76%
Treasury  2.49%  — 3.50%  —
Intermediate corporate   2.69%  — 5.19%  —

Data: Moody’s Investors Service. Assumes a tax bracket of 43.4% (the top marginal federal tax bracket of 39.6%, plus a 3.8% Medicare tax). Bonds rated AAA represent highest quality; however, the security’s credit rating does not eliminate risk.

Chart above is for illustrative purposes only and is not representative of the performance of any specific investment. Taxable equivalent yield is the tax-exempt yield ÷ (100% – your marginal tax rate). Past performance does not guarantee future results.

  • Historically, defaults remain low over the long term.
    Despite Detroit’s high-profile bankruptcy filing, the municipal market has remained very resilient in the years since the financial crisis. In fact, long-term cumulative default rates have been notably low1. This is true for municipal debt across the entire ratings spectrum. (See “Municipal debt: A model of resilience.”)

  • Municipal bonds have become inexpensive relative to risk-free bonds. 
    On September 16, 2013, municipal bonds were yielding 111.5% of Treasury yields. This is a steep climb from the beginning of the year, when such yields stood at 107.49%, and well above municipal’s long-term average yield of 107.06% of Treasurys. (Data: Thomson Municipal Market Data.) Importantly, today’s figures speak to the potential value opportunities available within the municipal market at the moment.

1According to analysis of municipal bonds that have been rated by Moody’s Investors Service.

Municipals: The benefits of active, professional management

We believe recent volatility within the muni market highlights the importance of bottom-up (bond-by-bond), fundamental research — the same type of research we employ within the mutual funds we oversee.

For most individual investors, direct purchases of municipal bonds can entail considerable research time and transaction expense. Mutual funds, however, offer convenient access to diversified and highly vetted portfolios of municipal holdings. These portfolios are monitored daily and are managed within tight risk parameters.

The views expressed represent the Manager’s assessment of the market environment as of September 2013, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Fixed income securities can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder a issuer’s ability to make interest and principal payments on its debt.

The Fund may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

High yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.

Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to state or local taxes and/or the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

Funds that invest primarily in one state may be more susceptible to the economic, regulatory, regional, and other factors of that state than geographically diversified funds.

Diversification may not protect against market risk.