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Municipal Bond Yields (non-taxable) vs Treasury Yields (taxable)

February 03, 2008

By MoneyRates Team | Money Rates Columnist

A strong global surge into United States Treasuries has pushed yields on T-Bills, T-Notes, and T-Bonds lower and lower with a bottom not yet in sight. The same buying surge has not been witnessed in the Municipal Bond market and as shown below yields are higher at comparable terms than Treasuries.

Municipal Bond Averages vs U.S. Treasury Yields

2-year 2.66% Muni average vs 2.07% Treasury average

5-year 2.94% Muni average vs 2.74% Treasury average

7-year 3.13% Muni average vs 2.96% Treasury average

10-year 3.59% Muni average vs 3.57% Treasury average

15-year 4.17% Muni average vs 3.84% Treasury average

20-year 4.44% Muni average vs 4.15% Treasury average

30-year 4.51% Muni average vs 4.31% Treasury average

The interesting part about the above yield averages is that they do not reflect the fact that most municipal bonds are exempt from state and federal income tax. For those investors interested in determining the yield premium in municipal bonds the taxable yield equivalent (in U.S. Treasuries) can be computed as follows:










Part of the large yield premium currently seen in munis is the perceived safety implicit in U.S. Treasuries, considered the world's safe haven for money, has led to near panic-buying in Treasuries globally. Global investors are less likely to buy municipal bonds as the tax benefits do not apply for them. Municipal bonds are issued and backed by local governments with a separate bond ratings for each issue and in addition many times the bonds are insured. So while each issue has a differing level of safety, in general there are very few defaults in the municipal bond market. Investors interested in purchasing a muni bond with their plush (comparatively) yields can research current municipal bond offerings listed in The Wall Street Journal or Barron's or consult with a local broker. Muni Bonds considered high grade-high quality are rated Aa3 or better by Moody's, AA- or better by Standard and Poor's, or AA- or better by Fitch.

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