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Wednesday, Aug 27, 2014

High Yield Munis

New issues of municipal bonds that currently come to market are largely oversubscribed due to strong demand created by a shortage of supply and higher personal income taxes. A steady stream of cash traditionally flows into the muni bond market, as investors receive roughly $350 billion a year from scheduled principal and interest payments. However, for 2014 municipal bond issuance may not reach $250 billion.

Supply Shortage

For the fourth year running low issuance continues to shrink the total amount of outstanding muni bonds to a five year low of $3.6 trillion. There is another factor further reducing the supply of munis available to individual investors; since 2009 banks and insurance companies have increased their muni bond purchases by 30% or $45 billion annually. The shortage is more acute for higher yielding munis which are much sought after by municipal bond fund portfolio managers. Citing an extreme shortage of high yield munis Invesco, a large muni mutual fund recently shut off its high yield fund to new investors. High yield muni issuance for the past 12 months was $990 million, less than half of last years $2.1 billion. Higher yielding munis offer considerably more income with returns ranging from 5% to 7% tax exempt, which to “High Net Worth” individuals are the equivalent of 7% to 13% when compared to taxable investments.

High yield munis are not suitable for all investors

If not bothered by volatile price swings or ratings, sophisticated well informed investors can realize higher returns from a “buy and hold” strategy for a portion of their portfolio that considers “Aggressive”, well researched higher yielding municipal bond investments that can offer investment grade security. Increasing the annual rate of return or the annual rate of interest on a municipal bond portfolio from 4% to 5% in effect increases annual tax free income by 25%. Higher yielding munis are usually “Aggressive” investments suitable for sophisticated well-informed “High Net Worth” investors.  Higher yielding munis fall within a range of ratings generally from “A-” to “non-rated”. The above average returns available in relation to similar rated bonds, in many instances, are the result of negative headlines, not default concerns. A high yield muni investor must be well-informed and willing to take on the additional market and liquidity risk that comes with headline risk. 

Learn more about investing in bonds by putting a municipal bond specialist to work for youWe offer investors the ability to compare prices on a specific tax-exempt municipal bond in a relatively short period of time. Contact us today for more information or call 877-467-0070.