Try as I may I can not understand why investors and savers buy US Treasuries at .10% which is in all truth paying the US government to hold your money when the same investor can buy North Carolina municipal bonds in the 4.0% to 5.0% range from AAA rated issuers. Add in unlike US Treasuries municipal bonds are triple tax free if you live in North Carolina. The State of North Carolina and many state agencies can not declare bankruptcy and must pay interest and indebtedness on a timely basis, just like the US government. These bonds are safe and with the tax advantages of no state and federal tax the effective rate on a 5% bond is 7.35% in a 28% federal and 7% state tax bracket.
The bond scarecrows of last winter have been proved wrong as most municipals have regained their capital value standing and continue to pay dividends. In my municipal bond portfolio currently there are well over 50 different issuers in the state of North Carolina and not a single one is even near default and all have never missed a bond payment in over 30 years of my owning municipal bonds. In fact if you had kept your cool back in this past winter and even more so in the big panic of late 2008 and early 2009 and bought municipal bonds then you could also be sitting on some fat capital gains. For instance I bought some Carteret County school bonds in late 2008 for 75 cents on the dollar with a coupon paying 4.5% and now they are valued at 105 cents on the dollar. That is a 40% gain in bond value in three years again pointing out the time to buy bonds is when people are either selling them in a panic or when rates are higher than normal. Of course I am not selling as my bond interest on capital invested is what would be a 8.8% taxable yield. Try getting that in a no risk environment nowadays. When the bond matures in 2025 I will get 100 cents on the dollar for the 75 cents invested so I will still get my capital gain.
There are two types of municipal bonds, revenue bonds and general obligation bonds known as GO's. Revenue bonds are based on entities like airports, hospitals, electric utility systems or nursing homes. The interest is paid out of operating revenues of these institutions and the principal paid back when due via a sinking fund that pays off the indebtedness over time as required. Revenue bonds are considered as having more risk, but I consider them safe if you choose wisely. Take an airport bond. An airport like Raleigh-Durham builds a building and pays for it via tickets from passengers and frankly can raise prices on tickets anytime needed to pay for the bonds. Safe bond in my opinion unless the airport goes out of business which frankly will not happen. Many county hospitals issue revenue bonds, the hospital just adds into the cost of service the cost of bond payments. Of course you again do some research and choose carefully when buying. For instance I own some Wake Med bonds and we all know that hospital is not going out of business. General Obligation bonds such as the Carteret County school bond I mentioned earlier are considered super safe, since schools are here forever and the county pays for these via general property tax. So when the county decides the tax rate they just add in bond service into their annual budget and raise taxes accordingly. Other GO's include water systems and road bonds.
One other category of municipal bonds that many overlook are federal mandated triple tax free offshore bonds. I currently own bonds issued on Puerto Rico, Guam, and the Virgin Islands. To help the economy in these areas the federal government long ago passed law that makes the interest on these bonds triple tax free to anybody in any state. The risk here is a bit greater, but so is the coupon on the bonds. Rarely do you find one paying less than 5%. A good bond portfolio could mix in some of these and be considered good diversification.
Smart investors use municipals to do what I suggested back in an earlier posting and "salt" away some safe money into these for future income and good sleep at night. So next time you consider US Treasuries take a look at municipals first.
Full disclosure: I own NC municipal bonds.
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