If you’re interested in bonds with the safety of Treasuries along with high tax-exempt yields, consider potential "pre-refunded" municipal bonds. Those are municipal bonds that might be refunded. If they are, they eventually will be backed by Treasuries.
When a municipal bond is refunded, the issuer brings out a bond at a lower rate to replace a bond that was issued earlier at a higher rate. Typically, the issuer will use the proceeds from the new bond offering to buy Treasuries or other government debt. Eventually, those government bonds will be sold or redeemed so the proceeds can be used to retire the older bond.
Investors find pre-refunded bonds appealing because:
* The original bond is essentially backed by the federal government, with a higher yield than Treasuries offer.
* When the issuer redeems the older bond, the investor will have enjoyed a high long-term yield for a short holding period.
* Prices for pre-refunded bonds are bound to rise as they near their maturity date.
If the idea of owning bonds with relatively high yields, tax-exempt interest, and protection against default appeals to you, some municipal bond funds hold pre-res, as they’re known. Another option is to invest in Market Vectors Pre-Refunded Muni ETF (PRB), an exchange traded fund that holds these securities. Or simply ask your broker if pre-res are available for investment.