34 KIPLINGER’S PERSONAL FINANCE^ 02/2020POONWAT
CHARA-AMPHAIW
ANmanager Duane McAllister puts it, the
security of knowing you are lending to
public institutions rather than to cor-
porations that are subject to industry
cycles or laboring under high or ques-
tionable debt burdens. Recession, as
always, is a risk, but where’s the reces-
sion? Not seeing it, friends.
Taxable munis also benefit from
being mostly non-callable, unlike
corporate bonds. Although some
are slated to be refinanced on a fixed
schedule, you can assume the attrac-
tively high coupon will survive 10
years or longer. Jason Audette, who
manages separate municipal accounts
for Appleton Partners, calls the design
“a low-risk, high-income anomaly.”
Though I often espouse owning indi-
vidual muni bonds, there are a few
of these I would reject, such as debts
backed by nursing homes and minor-
league baseball parks. Fund inves-
tors can consider the INVESCO
TAXABLE MUNICIPAL ETF (SYMBOL
BAB, $32), tracking the per-
formance of a U.S. taxable
muni debt index, and two
closed-end funds, BLACKROCK
TAXABLE MUNICIPAL BOND TRUST
(BBN, $24) and NUVEEN TAX-
ABLE MUNICIPAL
INCOME FUND
(NBB, $22).
The closed-
ends’ active
manage-
ment has
given them
an edge,
and both are,
remarkably,
priced below
net asset value. ■INCOME INVESTING Jeffrey R. KosnettTaxable Munis? They’re Worth a Look
T
o herald this new decade, I de-
cree that we quit bemoaning the
Great Recession and credit crisis
of 2008–09 and its many calamities.
It happened, it was costly, we learned
something about defaults and diversi-
fication—and it’s old news. But before
we lock the door on those dark days,
I offer a shout-out to one of the melt-
down’s few rewarding legacies: the
taxable municipal bond.
Yes, there is such a thing. A handful
are general obligation bonds, issued
by municipalities, but the vast major-
ity are construction or infrastructure
bonds issued and backed by a public
entity. Some 15% of fresh state and
local debt today pays interest subject
to federal income taxes, and the yields
to maturity are considerably higher
than Treasuries or regular municipals—
often, over 3% for 15-year bonds or 5%
for 20-year debt. In 2019, taxable muni
issuance spiked amid high demand,
and that has carried into
2020 because of the hunt
for yield and these bonds’
powerful appeal for IRAs,
pension funds and foreign
buyers who would gain no
advantage from tax-frees
anyway.
Overseas demand
is often the trigger for
issuers to add a smaller taxable por-
tion to a large tax-exempt offering.
After all, a 3.2%, 15-year bond rated
A+ and backed by, say, an international
airport’s terminal and parking revenue
is an easy sell in negative-yield Eu-
rope. Taxable muni issuers have re-
cently included the Port Authority of
New York and New Jersey, the Dallas–
Fort Worth airport, the Multnomah
County, Ore. (Portland-area) school
district, and several state college and
university systems.Sound describes the credit quality.
But it doesn’t do justice to the perfor-
mance of these bonds. Standard &
Poor’s Taxable Municipal index has
returned 12.9% over the past year,
compared with 8.1% for the compara-
ble S&P long-term tax-free index and
10.8% for the broad bond market yard-
stick, the Bloomberg Barclays U.S.
Aggregate. Vanguard’s broadest tax-
able bond exchange-traded fund, BND,
made 10.9%, which is sweet but not as
spectacular as taxable muni returns.
Lest you dismiss these munis as a one-
year wonder, the 10-year annualized
gain for that S&P taxable muni index
is 6.5%, which beat the 5.3% from an
index of bonds issued by firms in the
S&P 500 index, a fair comparison of
high-grade taxable issuers.Strong fundamentals. The engines
for continued impressive returns
are the fundamentals, whichinclude more-
compelling yields
than other tax-
able debt,
compar-
able or
superior
credit
ratings,
and, as
Baird mu-
nicipals maven
and portfolioJEFF KOSNETT IS EDITOR OF
KIPLINGER’S INVESTING FOR
INCOME. REACH HIM AT JEFF_
[email protected].SOUND DESCRIBES THE
CREDIT QUALITY. BUT IT
DOESN’T DO JUSTICE TO THE
STELLAR PERFORMANCE.INVESTING Commentary