Investors searching for income were buoyed by the move higher in the 10-year Treasury yield, but there are also some other opportunities to bring in some cash. On Tuesday, the yield on the benchmark 10-year Treasury touched a high of 3.983%, its highest level since Nov. 10, amid expectations that the Federal Reserve will keep interest rates higher for longer. The yield was last lower by 1 basis point at 3.912%. Yields move inversely to prices. Meanwhile, the stock market is struggling. The early-year rally has lost steam and the major averages ended February with losses . The S & P 500 has a dividend yield of 1.64%. That may have investors on the hunt for income. Those interested in the relative safety of Treasurys can build a ladder of varying maturities . However, another way to earn yield is through municipal bonds , which may particularly appeal to high earners in high-tax states thanks to its tax advantages. Munis The debt securities are issued by government entities, such as a state or city, and raise funds for public projects, such as building schools or roads. They are generally free of federal taxes on interest and may avoid state and local levies, depending on where you live. “It’s not going to be U.S. federal government guaranteed like a Treasury, but it will be guaranteed by the municipality,” explained certified financial planner Ian Weinberg, CEO of Family Wealth and Pension Management. A one-year AAA rated municipal bond has a 3.147% yield to worst as of Friday, according to Raymond James’ weekly interest rate monitor report. A 10-year AAA rated muni has a yield to worst of 2.616. A yield to worst is the lowest possible yield on a bond can have without defaulting. The tax-equivalent yield, which is the return a taxable bond would have to yield in order to compete with the muni, is 4.996% for a one-year and 4.153% for a 10 year. “Munis are a deal. We see them as a great alternative to taxables at this point, if you can build the right portfolio,” Weinberg said. That means working with an institutional money manager who can do the credit research, something he thinks shouldn’t be done by individuals, he said. “They can blend A with AA and AAA and you can get better yields,” Weinberg explained. In fact, a good signal to buy munis is when their yields are at least 85% of corresponding Treasury yields, he said. That’s because with a Treasury, you are paying tax on your interest earnings. Therefore, even if a highly rated muni bond of the same duration has a yield that is lower, you still may be earning more since they generally aren’t being taxed. Right now, munis are yielding about 90% to 95% of what Treasurys are yielding, Weinberg said. Investors can also buy municipal bond funds to get exposure to the market. CFP David Sheaff Gilreath, partner and chief investment officer at Sheaff Brock Investment Advisors, prefers funds and believes intermediate munis in the “sweet spot.” “They don’t have the duration risk of the longer maturities, but the yields are comparable,” he said. Plus, many state and local governments are flush with surpluses, so credit quality in the municipal bond market is much stronger than in the recent past. “That could help muni-bond funds ride out a recession that could hurt corporate bonds,” he said. Corporates? Investment grade corporate bonds also have high yields. However, they bring more risk than government bonds since you are buying corporate debt. Investors can buy them in $1,000 increments. For a bond to be considered investment grade, it should be rated Baa or above by Moody’s or BBB and above by S & P and Fitch. The shorter the bond’s duration, or average maturity, the less interest-rate risk you have. The risk picks up the farther out you go. Investors can also get exposure through a diversified exchange traded fund, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF . Funds are liquid, so it’s easy to trade in and out of them. The issue is that during times of volatility, there may be a lot of outflows.
