Investors seeking high after-tax yields may prefer municipal bonds and muni bond funds these days, rather than taxable bonds. Munis offer yields that compare very well with Treasury yields: insured, AAA-rated 30-year munis yield nearly 5 percent while long-term municipal bond funds pay almost 4 percent. After-tax, high-bracket investors will wind up better off with munis.
Many bond market analysts now prefer intermediate-term bonds. If the dollar continues to weaken, foreign investors may leave the U.S. bond market, depressing prices, and long-term bonds could be hit the hardest. That’s not a risk in munis, though, because they’re mainly held by domestic investors, so you might as well go for the high yields on long-term municipal bonds.
Buying munis issued in your home state generally will allow you to avoid any income tax on the bond interest; holding such bonds until maturity will prevent you from losing principal.
