Yield Curve Gains Slope and Munis Look Attractive

Munis are becoming much more attractive than the best online CDs and savings accounts.

Treasury yields have increased over the last couple of days with the 5-year getting above 2% and the 10-year above 3%.  This, combined with margin calls, has caused some interesting munis to come to market. 

I have been buying strong credits in New York which still have insurance on them (FSA or Berkshire-insurance) at discounts that yield anywhere between 4.5% and 4.9% over a 10 to 15 year term.  I am buying these in small lots because I recognize that even in the current era where the Federal government is going to be pumping money to the states and municipalities, a default is always possible.

Still, the tax-equivalent yield is well over 6%, and that is very attractive in an environment where savings accounts are yielding around 2.25% and you aren't going to see a 1 year CD at 3%. 

In addition to default, the risks are clear:

1)Munis require tying money up for years and years, and this will be a very poor investment if the current low interest rates are followed by a period of hyperinflation because our federal government can no longer sell its debt to the Chinese and Japanese.  I view this as very possible so I am only allocating small amounts to munis as a whole.

2) if you have a 10-15 year time horizon, you will always do better in the stock market.  It just takes balls of steel to convince yourself of this at the moment.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • Julian

    March 12, 2009

    "if you have a 10-15 year time horizon, you will always do better in the stock market. It just takes balls of steel to convince yourself of this at the moment."

    That's not true. The Dow and S&P have gained 0% over the last 12 years. The fifteen return isn't much better. You would have done much better in munis over the same time period. The same is true if you look at stocks and bonds over longer timeperiods.

    In Japan, stocks have provided a 0% return going on 25+ years.

    The conventional wisdom which says stocks outperform bonds is not so true.

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