In March, I told DailyWealth readers about this year’s biggest income opportunity – tax-free municipal bonds.
Most people were scared to death of the idea. Last winter, Wall Street sensation Meredith Whitney went on 60 Minutes and predicted a collapse in the municipal market. She said 50 to 100 “significant” municipal bonds would default, adding up to “hundreds of billions of dollars.”
At a conference last week, Whitney reiterated her claims that there will be “hundreds of billions of dollars” in defaults. Whitney believes that while states may be able to repay their debts, local governments won’t be able to repay bondholders. Without the states’ funds to rescue them, she expects these localities to default.
She was wrong last winter. And she’s STILL wrong. “Muni bonds” can make a great addition to your income portfolio. Here’s why…[ad#Google Adsense 336×280-IA]Municipal bonds are loans made to state and municipal governments. Since these bonds are often backed by the local taxing authority, more tax revenue means safer bonds.
After falling 1.7% in 2009, state personal income rose 3% in 2010. From 2009 to 2010, tax revenue has climbed more than $30 billion. More tax revenue means more secure interest payments and lower default risk. Muni-bond investors are more likely to get their money back over time.
And so far in 2011, only nine localities have defaulted. Their defaults totaled $0.25 billion compared to about $1 billion by the same time last year.
So these investments are getting safer… And right now, prices are set to rise.
You see, supply is decreasing. States are issuing the lowest amount of debt in over 10 years. Only $46.4 billion in debt has been issued so far in 2011. If it keeps up at this pace, total debt for this year will be less than $200 billion. Last year, total debt issuance was around $430 billion.
This decrease in debt issuance will keep prices up. And as investors see how rich the yields are on muni bonds, prices will rise even more.
Right now, you can get 10-year municipal bonds yielding 2.7% versus 3.1% on the U.S. 10-year Treasury. Although municipals are yielding a little less than Treasurys, munis are where you want to be…
To encourage folks to invest in government projects, interest received from munis is exempt from federal income tax and, in many cases, state and local income taxes.
So let’s say you’re an investor in the 33% federal income tax bracket. You’ll earn your tax-free 2.70% on municipal bonds. But on your Treasury bonds, you’ll only collect 2.08% after taxes.
And with analysts like Whitney exaggerating the danger, investors have fled. After she made her first pronouncement, municipal bonds suffered a huge selloff: $30 billion drained out of the sector in just three months.
That’s good for us, though. We get the tax-free income plus the chance at capital gains as investors creep back into this sector.
If you’re interested in this idea, you can find individual bonds through brokers like Schwab and Fido. But be sure to diversify your portfolio with at least five different bonds… Also, look for bonds that don’t have a super-long maturity… If rates go up, you’ll see the value of the bond go down, and you might have a hard time holding it.
If you’d prefer a “one click” bond fund, I recommend low-turnover funds. That means they don’t trade to make money – they pick long-term investments. And that’s good for bond funds, because you’re not selling at a loss if rates go up.
In sum, it’s not too late for you to take advantage of this safe income investment. Don’t let the talking heads talk you out of it.
Here’s to our health, wealth, and a great retirement,
— Doc Eifrig
P.S. In my Retirement Millionaire portfolio, we have two muni bond investments. The first one I recommended is up 70%… and still a good buy. The second one is just getting started on its run… and it’s paying a taxable equivalent 9% yield. This is one of the safest ways to collect high income you’ll find in the market today. To learn more about Retirement Millionaire, click here.
Source: Daily Wealth