Markets & Economy
Tim Buckley on the outlook for municipal bonds
February 03, 2014
Rebecca Katz: You just mentioned municipals and Norm2911 tweeted, "What is our outlook for muni bonds this year because 2013 was kind of rough." You were talking about shorter-term munis, but do we have a perspective on municipal bonds?
Tim Buckley: Certainly. Muni bond investors—they tend to be a little bit more skittish than the rest, whether bond investors or stock investors. We can't tell you why, but when there's bad news, they're closer to the door than anybody else. They're quicker to the door than anyone else. They tend to get out on bad news and get back in on the good news. Again, not a behavior you necessarily want to follow. Right now in the muni world, what's affecting it? Bad news on Detroit. Everyone knows Detroit's in bankruptcy and then a lot of news on Puerto Rico and their economic situation there. What that masks is—so it's this overhang of Detroit and Puerto Rico, but the rest of the municipalities out there are actually doing a lot better than they were a few years ago.
Think about—look, real estate's coming back, markets are coming—like tax rates, tax revenue is going up, which is better for the muni market. It's a bit of an ignored asset class right now, not total, but when you just look at the yields, the relative yields, if you looked at intermediate-term muni and you did the taxable equivalent yield on that, it would be about 4%. And if you want to do intermediate-term investment grade, the taxable side, that is around 2.88% yield.
So that tells you that—and we're talking about you might be getting a little bit better quality on the muni side than the corporate side, so and I did that—I should put the caveat on there that equivalent is for the highest tax bracket. You'd have to adjust it for your own tax bracket.
Bill McNabb: For investors in a high tax bracket, munis are actually relatively attractive right now versus any other fixed income vehicle, especially real high quality muni portfolios.
All investing is subject to risk, including the possible loss of the money you invest.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2014 The Vanguard Group, Inc. All rights reserved.
Vanguard's CIO looks at the muni market
"Think globally, act locally" is a mantra for many municipal bond investors. Vanguard Chief Investment Officer Tim Buckley says that despite alarming headlines about some municipalities you should look at quality and yield before heading for the exits.
Other excerpts from this webcast:
- Bill McNabb on Vanguard's philosophy and culture
- Tim Buckley on Quantitative Easing
- Managing your portfolio and your emotions
- Stocks or bonds? Not an "either-or" proposition
- All investing is subject to risk, including the possible loss of the money you invest.
- Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
- This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.