Municipal Bonds Remain an Intriguing Opportunity
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View from the Observation Deck

  1. Investors were offered a healthy yield spread of 91 basis points for General Obligation Municipal Bonds (GOs) over T-Bonds (both 20-year maturities) at the close of February 2012.
  2. Municipal bonds should yield less than Treasuries since interest on municipal bonds is exempt from Federal income tax.
  3. As the chart shows, Treasuries began the period (12/06) yielding more than GOs, but significantly outperformed them during and after the financial crisis in 2008. The Fed didn't include municipal bonds in its quantitative easing.
  4. Municipal bonds traded under a dark cloud for much of 2011 due to a high-profile analyst's forecast calling for a severe spike in municipal defaults. The defaults never materialized to that extent.
  5. In fact, Moody's just reported that the number of municipal bond defaults averaged just 2.7 per year from 1970-2009. The number of defaults did increase from 2010-2011, but only to 5.5 per year.
  6. From 2/29/12-3/20/12, the yield on the benchmark 10-Year T-Note rose 39 basis points on stronger than expected economic news, vs. a rise of about 27 basis points for the Bond Buyer Index (GOs).
  7. Investors need to monitor more than just yield spreads moving forward. This is an election year. The House Republicans just released their own budget proposal featuring tax cuts and more deficit reduction than the Democrats proposed.
  8. President Obama has stuck to his message that tax rates should be adjusted higher on millionaires and billionaires, and it is also uncertain as to whether the Bush tax cuts (set to expire on 12/31/12) will be extended for a third time.
  9. If tax rates go up for the wealthiest of Americans, the tax-free income distributed by municipal bonds could become highly sought after, in our opinion.
Posted on Wednesday, March 21, 2012 @ 2:36 PM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.