Bonds are Boring, But…
…Bonds yielding 5% tax-free income are now a possibility for some fixed-income investors.
Interest rates have risen dramatically over the past year as the Federal Reserve has increased interest rates to slow the U.S. economy and to curb rampant inflation. An economic slowdown, increased borrowing costs for both individuals and corporations and an unaffordable housing market that has 30-year fixed rates approaching 8% are all direct consequences of these higher rates.
However, buyers of fixed-income investments are now becoming the beneficiaries of the increase in rates. In 2023 we have witnessed the S&P 30-year Municipal Bond Index reach a yield of over 4.71% – a level that we have not seen in almost 15 years. With yields at these levels, now may be the time to consider buying high-quality individual municipal bonds.
Investors who buy individual municipal bonds do not generally have to pay federal income tax on the interest earned and may also be exempt from state taxation if the bond they hold is from the state in which they reside. This means that if an investor in the highest tax bracket can buy a 5% municipal bond, the taxable equivalent yield would be over 8%!
As a result of these higher yields, we believe it prudent for investors to consider the opportunity that exists in today’s market. Although we may not know for certain what the Fed will do in the future regarding interest rates, we do know that if you are buying municipal bonds today, you are buying at yields that have been unavailable for almost 15 years. By doing so now, you may find yourself resting easier knowing your portfolio is working harder for you, helping to meet income needs, while others nervously guess, hope, and wait for what may never exist.
Hennion & Walsh Experience
We have investment professionals, planners, and portfolio managers who can collectively analyze your situation through the lens of their respective disciplines. Each member brings valuable insights to apply to your situation. Whether you are looking for income strategy guidance or growth strategy guidance, a second opinion of all your investment accounts not currently held at Hennion & Walsh could be beneficial to your financial health.
Disclosures: This commentary is not a recommendation to buy or sell a specific security. Investing in bonds involves risk including possible loss of principal. Income may be subject to state, local, or federal alternative minimum tax. When interest rates rise, bond prices fall, and when interest rates fall, prices rise. Past performance is no guarantee of future results.
