Municipal Bonds Offer Opportunities, RidgeWorth Paper Shows

Citing five key benefits of investing in munis – tax-free income, low default rates, low price volatility, diversification, and attractive total returns – the white paper also looks at the return to long bonds, stimulated by the near-zero interest rate as investors seeking higher yields try to lock in returns for longer terms, and suggests that there may be a rush to invest in BAB as 2010 draws to a close. BAB, unless extended, expires at the end of the year; if it is extended, there is speculation that the subsidy rate will drop from 35% to 28%.

There is, of course, the potential for problems because of budget and credit problems in municipalities as they struggle to keep up with tax rate caps, lower collections on personal income and sales taxes, and drops in home values; however, the paper says, “no evidence of an unusual amount of municipal bond downgrades has surfaced during the first quarter 2010, with the exception of a few well-publicized states.” Indeed, higher tax rates are expected to offset shortfalls, which will, says the paper, result in “a higher taxable-equivalent yield” for all tax-exempt bonds, “and bonds sold in the future will sell at higher prices than if taxes had not increased.