Municipal bonds are not a particularly sexy topic, but Scott Berry at Morningstar.com, notes that muni bonds look more attractive that taxable bonds at the moment. This is not an interest rate call, but rather a relative-value call. A comparison of bond mutual fund yields provides some insight:
Direct comparisons are difficult to make because comparing bond funds isn’t always an apples-to-apples comparison. However, a look at Vanguard’s bond lineup shows that its muni funds currently look a bit more attractive than its taxable offerings. Vanguard Intermediate-Term Tax-Exempt VWITX, for example, yields 3.49% (4.85% tax equivalent for the 28% bracket) while Vanguard Intermediate-Term U.S. Treasury VFITX yields just 4.13%. Meanwhile, Vanguard Intermediate-Term Bond Index VBIIX yields 4.67%, and that fund takes on more credit risk and interest-rate risk than its municipal sibling. And Vanguard’s funds aren’t alone, as Fidelity’s intermediate muni fund also boasts a yield advantage over its taxable counterparts.
Investment returns need not always come in big chunks, some times a simple upgrade can provide additional yield with little or no additional risk. Muni bonds are not appropriate for many investors, but for eligible fixed income investors a look at munis may now be appropriate.