Muni Bond Funds - the Investment Opportunity for Stormy Financial

Muni Bond Funds - the Investment Opportunity for Stormy Financial Times

To the meticulous investor, there is always some kind of great investment opportunity to be had; but there is no way to predict what it might be without a great deal of hard work. Lately though, the investment opportunity of favor has been municipal bond funds - endearingly known by its nickname, muni bond funds. The stock market has certainly been improving of late; but that's just the general picture. For lots of stocks, the reality of the recovery hasn't come around yet. And investors are finding the bargain that is to be had in the steady returns and the strong guarantees offered in these kinds of investments quite irresistible. It's hard to tell now which industries will be the ones that make it through all of this tumult. For now, muni bond funds seem like the perfect way until the dust settles.

Not that municipal bonds have been all that insulated from the storm outside. The businesses that have always insured muni bonds are themselves in a lot of financial trouble, having lost a lot in the mortgage and housing mess from two years ago. When their financial viability becomes a troubled question, it becomes hard to say how reliable the guarantee on the muni bond funds is. So insured munis are seeing their value slip, and the non-insured ones are going along for the ride too.

But it's kind of curious; in the past, when the country has been through recessions, no more than 1% or so defaulted in high-quality municipal bond funds. And treasury yields have gone down to very low levels too as a result of the way investors have abandoned ship and run off to quality investments. What with all of this happening and the fact that hedge funds have been abandoning muni bond funds too, things have come to a strange pass.

Muni bond funds now pay investors better than treasuries do. This is just about the opposite of what muni bonds have been like for years. The Vanguard Intermediate Term Treasury for instance has been yielding about 3.5%; and the Vanguard Intermediate Term Tax Exempt has been yielding 3.8%. That's an absolute reversal of fortunes among these two from the way things were before. And when you take taxes into account, the situation is nothing short of amazing. Try the bond calculator on MorningStar; it allows you to calculate what your accrued true yields will be. If you have a 30% federal tax rate and a 5% state tax, you get a tax equivalent yield of about 6% for the muni fund, and about half that for the treasury fund. And you don't even need muni insurance anymore if you buy a good-quality muni bond fund.

Try to buy a muni bond fund and to not go for a muni. You'll have much better experience and negotiating power working for you. They can get better secondary market rates than you could get from your broker. A 5% tax equivalent yield may not give you the rush you're looking for; but it should be a good way to bring some stability in to your battered portfolio.