Investor Favoring Treasuries Over Municipal Bonds as Return Spread Narrows

Many investors who traditionally invested in municipal bonds are instead buying Treasuries as the yield spread between the two investments moves closer together. According to Bloomberg:

"Local government bonds due in three years with AAA ratings yielded 66 percent of similar maturity Treasuries last month, about the lowest level since Bloomberg began compiling the data in 2001. If the ratio moves closer to 60 percent, investors in the 38.3 percent federal tax bracket would lose all the benefits of sheltering income that comes from municipal debt."

While Treasuries are state and local tax exempt, municipal bonds are federal, and often state and local tax exempt. But the fear of higher taxes in the future have sent a wave of money into municipal bonds, which have driven down yields. At the same time, the Build America Bond program has reduced the number of municipal bond tax-exempt offerings, further increasing demand for the tax-exempt variety.

From the Bloomberg article:

“Treasuries are safer and more liquid investments, especially given the quality issues with many municipalities of late,” said Jeffrey Schoenfeld, partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “In this low-rate environment, Treasuries can be huge pickup and very good value on an after- tax basis in the shorter-end.”

Treasuries have advantages over munis including greater liquidity and less of a default risk. So, if an investor can pick up a Treasury at the same after-tax rate as a muni, it's a good investment.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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