As of this writing, the municipal bond market has lost over 5 percent in the past few weeks. Lower prices, in turn, mean higher yields for investors. If you’re interested in income and you buy high-quality municipal bonds or municipal bond funds, this can be a buying opportunity.
According to the latest Morningstar report, the typical municipal bond fund now pays 3.7 percent. That interest usually will be exempt from federal income tax. Bank CDs, on the other hand, pay 3 percent-3.5 percent these days, so you’d net less than 3 percent, after-tax.
If you’re concerned about rising interest rates, which can devalue bonds, stick with short-term munis, which have less interest-rate risk. Short-term muni funds now have an average yield of 3.2 percent, tax-exempt.
Among short-term munis, you might look into pre-refunded bonds ("pre-re’s"), which are backed by U.S. Treasury securities. They’re default-proof and offer yields around 3 percent, tax-exempt.
