In one sentence: Municipals Bonds are shielded from taxes, and taxes are going up.
What is Their Nickname?
Municipal bonds are referred to as “Munis.” Cute.
A Quick Refresher on Bonds
Bonds are the ‘grown up’ way to lend people money. The buyer of a bond (maybe you) lends someone money. In exchange for your kindness, the borrower will pay you a set amount of money every year. And finally, they will return the money to you.
For More Read: What is a Bond?, Investing in Bonds: Part 1
OK- What Are the Risks?
The risk is that the borrower doesn’t have the money to pay you back. Hence, cautious investors like to lend money to (or buy bonds from) people or “entities” that they think are safe.
What is Safe? Are Municipals?
The United States government is thought to be the safest bond issuer in the world. Their bonds are called Treasuries. However, because they are so safe, they are also very low yielding. After Treasuries, Municipals rank right up there in safety.
What are Municipal Bonds?
Municipals are bonds issued by a town, city or state. They can also be issued by any approved entity associated with said town, city or state.
So, to recap, you can buy bonds issued by the US Government (Treasuries), bonds issued by the Great State of Texas (Municipals) or bonds issued by Hewlett Packard (Corporate). There are others- if you really want to get wild and crazy. Read: Types of Bonds: The Cheat Sheet
Yes. And so are you- according to your mom.
But, Munis may have a place in your investment portfolio. Why? They are not only a historically safe type of bond- they are also tax free! You don’t pay Federal Taxes on the interest earned from Municipal Bonds.
And, it gets better; if you buy a bond that is issued within your home state- you don’t pay state taxes either.
Eh, Who Cares About Taxes?
Quick math- 10 year Treasuries are at 3.8% today (4/20/10). 10-year Munis are at 3.1% today. But, after Federal Taxes your 10-year Treasury is only paying 2.4%.
Go Muni, Go!
Surgeon General’s Warning
Not all Munis are created equal. Before investing make sure you fully understand the mutual fund or bonds you are selecting. We’re here to help if you need us.
