Last year I had accumulated $30k in municipal bonds in my taxable brokerage account as part of my tax strategy to earn tax free income and I’m happy to report that now a little over a year later I have $60k in munis earning a blended return of 5 percent. This is the tax free yield and the tax equivalent yield would be 6.41 percent.
I am now earning $3000 per year or $250/month tax free and it feels great to have that small amount rolling in month after month all tax free. It’s a great time to buy municipal bonds right now as some bonds are paying over 8 percent (tax equivalent yield) but the recent inflation surprises in the BLS reports has me worried that rates might go even higher over the next few months despite everyone expecting or waiting for the Federal Reserve to cut central bank rates!
Should You Buy Municipal Bonds?
For most people, municipal bonds don’t make sense but if you’re a high income earner and teeter on the brink between tax brackets, it’s a great way to earn money on your money and not have to pay tax or worry about being pushed into the next higher tax bracket.
Wait or Buy Now?
Like every other financial question, it depends. If you’re starting out buying bonds right now is a great way to start building a ladder. If you’ve accumulated over the last 12 to 18 months, it’s time to be strategic and pace your purchases and watch the inflation reports like a hawk.
Risks?
With any bond, there is always a risk of default which is why I have my own custom secondary AI driven bond default analysis tool that I do before I buy a bond. As part of my municipal bond diversification, I also own bond ETFs NEA and MLN in addition to individual munis.
Alternatives?
The alternative to owning munis, at least for me, is to hold cash and sell cash secured puts for additional income on a reliable ETF however this won’t help my tax situation at the moment and I am more concerned about a market correction calling my puts than I am about any bond defaults right now.
For now, I will keep an eye on my Fidelity feed that sends me bond postings and perform my analysis and make a decision. I just got an email for a $65 million issuance Texoma Utility Authority paying 8.22% (tax equiv yield) on the long end but haven’t done any research on it as tempting as it is right now.
Where To Find Alerts In Fidelity
If you have a Fidelity account, you can setup alerts by clicking on the NEWS & RESEARCH menu then choose alerts. Select Fixed Income Holdings under Account Services and follow the prompts.
Share The Wealth
Are you buying munis? Let me know what your faves are in the comments below.