Short-Term Muni Bonds Offer Value. Finally
April 30th, 2018
Short term interest rates are rising. Yields are being pressured by increases in the Federal Funds Rate and a growing supply of Treasury Bills and Notes to ﬁnance our large budget deﬁcits. This created a long awaited investment opportunity.
The yield on 2-year municipal bonds has followed course, rising from a mere 0.24% in March 2014 to 1.84% today. The municipal yield is magniﬁed when adjusted for taxes. For an investor in the highest tax bracket, the beneﬁts of double tax-exempt income would result in a 2-year tax-equivalent yield of 3.38% for Colorado residents and 4.00% for California residents.
For the ﬁrst time in years, investors can earn higher yields without taking the additional risk of longer-dated bonds. As seen in the chart below, it has been 10 years since the 2-year Treasury note provided a yield above 2.00%, and today it stands at 2.48%. Now you can invest in 2-year municipal bonds that capture 70% of the 10-year municipal yield while only taking on 33% of the duration risk.
Bloomberg data from 4/25/2018. 2 Year T Notes, Fed Funds Rate, 2 Year BVal AAA Muni. Tax equivalent Yield Calculation based on resident in highest tax bracket: 37% Federal Income Tax, 4.63% State Income Tax (Colorado) 13.3% State Income Tax (California) 3.8% ACA Tax. Past Performance is not indicative of future results. No prospective or existing client should assume future performance of any investment will be profitable or equal to historic returns. Yield calculations do not take into consideration management fees. Equus cannot guarantee the availability of similar yields in the future.