Muni Bonds May Offer Better Values Than Some Taxable Alternatives | Capital Group

Quarterly Outlook


Muni Bonds May Offer Better Values Than Some Taxable Alternatives

Given potential tax advantages, some muni yields appear relatively attractive

Ratio of Before-Tax Muni Yields to Corporate and Treasury Yields

Image shows that before-tax yields on municipal bonds are comparable to corporate and Treasury bond yields.

Source: Bloomberg Barclays Research and Bloomberg. Ratios, expressed as percentages, of yield-to-worst of Bloomberg Barclays Municipal Bond Index compared to Bloomberg Barclays U.S. Corporate Investment Grade Index, Bloomberg Barclays 10-Year Municipal Bond Index compared to 10-Year U.S. Treasury yields, and Bloomberg Barclays Municipal High Yield Index compared to Bloomberg Barclays Corporate High Yield Index, for the three years through January 30, 2015.

In early 2015, valuations looked compelling among high-yield munis. Ratios are a useful measure of relative value — expressing in percentage terms the relative “size” of before-tax muni yields compared to similarly rated corporates or Treasuries.

Depending on an investor’s net tax burden, investment-grade munis have recently offered after-tax yields that are comparable to those of similarly rated corporate bonds. Meanwhile, muni yields have appeared especially attractive relative to Treasuries.

Despite a brisk start to the year, the pace of issuance is expected to slow in 2015, which should offer a measure of support to muni bond prices — even if Treasury yields rise meaningfully. And, compared to Treasuries, the value of munis have often held up relatively well around times of rising yields.

After a lengthy rally in the municipal market, prices for many types of bonds have risen substantially. But thorough credit research can continue to uncover long-term value among the universe of revenue bonds supporting essential projects, such as hospitals, toll roads and airports.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.