This has been an unusual year for financial markets, with stocks and bonds falling in tandem.
For bonds, the declines mean yields have become viable again for income investors who over the previous decade or two had been forced to look to the stock market and take more risks to find the investment income they needed.
Lewis Altfest, co-founder of Altfest Personal Wealth Management, said during an interview that clients were “just starting to get interested in bonds again.” He pointed to municipal bonds as being particularly attractive.
There are different ways to invest in bonds. If you are looking for lower price volatility in an uncertain market, here are some easy ways to take advantage of a favorable setup in shorter-term bonds.
In this article we will focus on the income objective, specifically with long-term municipal bonds.
Municipal bonds are issued by states, cities or other municipalities, such as water districts. Many are exempt from federal income taxes, and if a muni is issued within your state, it may be exempt from state and local taxes as well.
Altfest’s firm is based in New York and manages about $1.5 billion for private clients. He shared a municipal bond strategy designed to offer the best combination of risk and reward in the current environment, especially for income-seeking investors in higher tax brackets who can commit for many years.
A list of municipal bonds for your review
First, let’s look at four examples of municipal bonds provided by Altfest, with data as of Oct. 26. Bear in mind that these are only examples, not investment recommendations. For advice specific to your needs, you may want to speak with an investment adviser, financial planner or broker.
| Issuer | CUSIP | Maturity date | Call date | YTM | YTC | Price |
| New York City Municipal Water Finance Authority | 64972GNC4 | 6/15/2047 | 12/15/2026 | 4.86% | 4.53% | 101.86 |
| New York City General Obligation | 64966QBF6 | 12/1/2044 | 12/1/2028 | 4.84% | 4.60% | 102.10 |
| New York State Urban Development Corp. | 650036CF1 | 3/15/2044 | 9/15/2030 | 4.85% | 4.72% | 101.95 |
| New York City General Obligation | 64966MHL6 | 12/1/2041 | 12/1/2026 | 4.85% | 4.54% | 101.85 |
| Sources: Altfest Personal Wealth Management, EMMA | ||||||
All four of these munis are rated AA or AA+ by Standard and Poor’s. These are solid investment-grade ratings. BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.
You can look up municipal bonds on your own at the Electronic Municipal Market Access (EMMA) website by typing in the CUSIP number. You can also search for bonds at the EMMA website by state, city or other municipal authority. If you do so on your own, be sure to find out if any muni that interests you is exempt from federal income taxes and those of your state and city, if applicable. You can do that by clicking the documents listed under “Disclosure Quick Links” on the EMMA site.
Definitions:
- Maturity date and call date — These bonds have long maturities. They also feature call dates going out four to eight years. An issuer of a bond may call the bond (redeem it at face value) on or after the call date. Altfest expects all four of these to be called on or after their call dates.
- Price — This is a bond’s price relative to its face value. If a bond is trading at its face value, we say it is trading at 100, or par. If it is trading at 1% above or below its market value, we say it is trading at 101 or 99.
- Coupon — This is not shown on the table to save space. It is the interest rate a bond issuer pays based on the bond’s face value.
- YTM — This is a bond’s yield to maturity, which is an annualized figure that factors in its current market price, the coupon and the capital gain or loss the investor would take if he or she held the bond to maturity, because of the premium or discounted price they would pay.
- YTC — This is a bond’s yield to call, which is similar to the yield to maturity, except that it incorporates the call date rather than the maturity date.
With the four bonds trading at premium prices, and considering the long maturities, it’s best for investors to make decisions based on the yields to call, which are lower than the yields to maturity.
When discussing the premium pricing for these bonds, Altfest made interesting points: “Premium bonds are less volatile as they provide a greater portion of their total returns from bond interest payments, and less from redemption price.”
With the short call periods (relative to the maturity dates), investors “should obtain higher-than-market total returns,” Altfest said. He added: “If they aren’t called or have greater periods before they are called, investors receive greater than 4%, or more than 7%, in pretax-equivalent returns.”
And the taxable equivalent yields may be much higher then 7% if you are in a high-enough tax bracket, as explained next.
The crux: taxable equivalent yields
The four examples above are most useful to investors who live in New York state and New York City, but they are exempt from federal taxes regardless of which state you live in.
First set: Married couple earning between $178,150 and $340,100 in 2023
Starting with the federal only, here’s how to calculate the taxable equivalent yield: Divide the yield to call by 1, less your highest graduated income tax rate. Click here for the Internal Revenue Service’s list of graduated tax rates for 2023 — the income brackets have been raised to reflect the high rate of inflation.
For our first set of examples, we incorporate the graduated federal income tax rate of 24% for a married couple earning between $190,750 and $364,200 during 2023.
For New York state (NYS), if you are married and living in New York City (NYC), with combined earnings between $178,150 to $340,100, your highest state graduated tax rate is 6.33%, plus another 3.876% for city income taxes, according to NerdWallet. That’s a combined state and city tax rate of 10.206%.
So here is a set of taxable equivalent yields for the four municipal bonds listed above:
| Issuer | CUSIP | YTC | Taxable equivalent yield for resident of NYC | Taxable equivalent yield for resident of NYS | Taxable equivalent yield for U.S. resident outside NYS |
| New York City Municipal Water Finance Authority | 64972GNC4 | 4.53% | 6.89% | 6.50% | 5.96% |
| New York City General Obligation | 64966QBF6 | 4.60% | 6.99% | 6.60% | 6.05% |
| New York State Urban Development Corp. | 650036CF1 | 4.72% | 7.17% | 6.77% | 6.21% |
| New York City General Obligation | 64966MHL6 | 4.54% | 6.90% | 6.52% | 5.97% |
Second set: Married couple earning between $364,200 and $462,500 in 2023
Moving up one tax bracket, the highest graduated federal income tax rate for a married couple earning between $364,200 and $462,500 in 2023 is 32%. If they live in NYS, the highest graduated tax bracket in this income range is 6.85%, and we stay at 3.876% for NYC:
| Issuer | CUSIP | YTC | Taxable equivalent yield for resident of NYC | Taxable equivalent yield for resident of NYS | Taxable equivalent yield for U.S. resident outside NYS |
| New York City Municipal Water Finance Authority | 64972GNC4 | 4.53% | 7.91% | 7.41% | 6.66% |
| New York City General Obligation | 64966QBF6 | 4.60% | 8.03% | 7.52% | 6.76% |
| New York State Urban Development Corp. | 650036CF1 | 4.72% | 8.24% | 7.72% | 6.94% |
| New York City General Obligation | 64966MHL6 | 4.54% | 7.93% | 7.42% | 6.68% |
In this second set of examples, the yields to call for NYS residents are all above 7%. For NYC, all exceed 7.5%, with two higher than 8%.
And 32% isn’t the highest federal income tax bracket. That’s 37%. You should run your own taxable equivalent yields based on your own income scenario or ask your financial adviser, financial planner or broker for assistance.
Municipal bonds may work for you regardless of which state you live in
If you live in a state with no income tax, your tax equivalent yield calculations are simple, as you only need to factor in your highest graduated federal income tax rate.
With rates having risen so much this year as bond prices have fallen, investors who seek income or who have been thinking of diversify beyond the stock market are in a position where the timing is right. It’s worth taking a look at what is out there. If your federal income tax bracket is high enough, municipal yields may be high enough to be attractive no matter which state you live in.
For more information about municipal bonds, yields, credit risks and how they are used by governments, “Lebenthal on Munis,” by Jim Lebenthal, might be a good book for you to read.
More detailed information for income-oriented investors:
