Muni Bonds Seen as Attractive Their Tax-Free Yields Are Today Close to Those of Taxable Treasury Bonds

Article excerpt

THE municipal-bond market - pummeled by the default of Orange County, Calif., last December - is finally edging back to life.

After a dearth of new issues from skittish jurisdictions around the United States early this year, scores of new bonds are again coming to market. Ratings have been generally high; there has been no new headline-grabbing Orange County-type default, which lost $1.7 billion in high-risk investments.

And the best news of all: "In relative terms, municipal bonds are very attractive right now," says Joe Mysak, editor of Grant's Municipal Bond Observer in New York.

With yields running between 6 percent and 7 percent last week, "muni" bonds are competitive with alternative fixed instruments, including United States government Treasury issues and corporate bonds. In fact, the spread between municipal bonds and Treasury issues has been at its lowest level since the October 1987 stock-market crash.

According to investment firm John Nuveen & Co., in Chicago, municipal bonds are now yielding 91 percent of 30-year Treasury bonds, a five-year high. (See chart.) That ratio had been as low as 80 percent just last summer. And in the summer of 1992, it was even lower, at 79 percent.

Add in the tax advantage of municipals, and the instruments look even better. Municipal bonds - issued by state and local government agencies to finance various types of civic projects - are usually not subject to federal taxes and, if issued in the state where you live, may also be exempt from state and local taxes.

Tempting yields

Last week, for example, the average yield for a muni bond on the Bond Buyer 40 index was 6.18 percent, compared with a yield of 6.85 percent for the 30-year Treasury bond. So, if you had $10,000 invested in a muni bond paying 6.18 percent, you would earn $618, compared with $685 from a 30-year Treasury bond.

But that is before federal taxes. The municipal bond is not subject to those taxes, but the Treasury bond is. This means that, if you are in the 28 percent tax bracket, the American government will take $191.80 of your earnings on the 30-year Treasury issue.

Clearly, many investors are rediscovering municipals, as illustrated by what's happening in the huge mutual-fund market.

Last year, flows into municipal-bond funds plummeted. Many investors, in fact, redeemed shares. At the start of 1994, investors had assets totaling $260 billion in 1,024 muni-bond funds tracked by the Investment Company Institute, an industry trade group in Washington.

But by the end of the year, after a large number of redemptions, assets had fallen to $227 billion. Now that downward spiral has stopped.

Muni-bond inflows were negative in January, March, and April of this year, but they were up substantially in February and May. …