Are municipal bonds better than CDs?
Key Takeaways. In general, tax-exempt municipal bonds (munis) are more attractive to those in higher tax brackets. To compare municipal bonds to taxable bonds, you need to determine the tax-equivalent yield of the muni. Though certificates of deposit (CDs) carry less risk, municipal bonds have tended to outperform them ...
After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.
Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you're losing out on a better rate. This will also cause the bond you are holding to decline in value.
Unlike bonds, which incur more risk, CDs offer a fixed rate of return, and the interest and principal on CDs generally are insured by the FDIC up to $250,000.
Because yields have recently improved among municipal bonds, investors no longer have to stretch for competitive income from lower-quality investments. And if valuations among municipals snap back as they have in the previous three decades, investors' source for competitive, total returns may also be closer to home.
Risk of Loss: CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum limit[1], while bonds carry the risk of issuer default. Diversification: Bonds offer a wider range of options (government, municipal, corporate), allowing for more diversification than CDs.
Taxes: Treasuries can offer tax benefits that CDs do not.
If investing in a tax-sheltered account, like an individual retirement account (IRA) or a 401(k), the tax benefits that Treasuries provide disappear, because earnings in these types of accounts are not subject to income taxes.
If you sit in the 35% income tax bracket and live in a state with relatively high income tax rates, then investing in municipal bonds (munis, for short) will likely be a better option than taxable bonds. Alternatively, if your income is in the 12% tax bracket, then you may want to steer clear of municipal bonds.
Interest rate risk.
U.S. interest rates have been low for some time. If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond.
Stability in periods of crisis
In fact, compared to other bond markets, the credit-quality ratings of the municipal sector have been very stable, not only during the COVID-19 crisis but also during the Great Recession of 2008 and other previous economic downturns.
Do bonds outperform CDs?
Key Takeaways. Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.
If you're looking for safety and predictability with your investments, CDs and bonds can offer both. However, CDs may ultimately be better for those who prefer the comfort of an insured investment.
In every case where we've compared purchasing Treasuries vs. CDs, Treasuries have been the better option. An investor would be better off rolling over 6-month Treasuries yielding ~5.4% than buying a 5-year CD yielding 5.4% that becomes callable starting in 6 months.
Retirees are often advised to shirt over to safer investments, like bonds. Municipal bonds offer the benefit of interest that's exempt from federal taxes. In some cases, state and local taxes won't apply, either.
Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
- VanEck Short High Yield Muni ETF.
- VanEck High Yield Muni ETF.
- SPDR® Nuveen Blmbg Hi Yld Muncpl Bd ETF.
- VanEck CEF Municipal Income ETF.
- BlackRock High Yield Muni Income Bd ETF.
- First Trust Municipal High Income ETF.
- Franklin Dynamic Municipal Bond ETF.
Key Takeaways. Buyers of brokered CDs often earn higher interest on them than traditional CDs but also are exposed to more market risks. The higher rates for brokered CDs are typically to offset heightened risk and greater required minimum balances.
Brokered CDs are issued by banks and sold in bulk to investment firms and brokerages where they become available to investors for purchase. By doing this, the broker brings a lot of money to the bank, which often results in higher APYs than you can get with a traditional CD.
Brokered CDs are issued by banks and sold to brokerages in bulk. Brokerages then turn around and sell those CDs to customers. Since brokerages purchase them in bulk, they can negotiate better interest rates on brokered CDs and offer higher rates than those on traditional CDs.
We believe the municipal market is poised for improvement in 2024. The Fed's anticipated easing this year should bolster demand for municipal bonds. If investor sentiment shifts positively, as we expect, strengthening demand could absorb secondary market supply and act as a catalyst for spread tightening.
Do you pay federal taxes on municipal bonds?
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes.
Yes, you can lose money investing in bonds if the bond issuer defaults on the loan or if you sell the bond for less than you bought it for. Are bonds safe if the market crashes? Even if the stock market crashes, you aren't likely to see your bond investments take large hits.
- iShares National Muni Bond ETF (MUB)
- Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)
- Vanguard Short-Term Tax-Exempt Bond ETF (VTES)
- Vanguard High-Yield Tax-Exempt Fund Investor Shares (VWAHX)
- iShares California Muni Bond ETF (CMF)
- iShares New York Muni Bond ETF (NYF)
Investment minimums for municipal bonds are typically $5,000 per bond, so an investor with limited funds to invest and who is seeking exposure to a wide range of maturities, sectors and credits might consider a mutual fund or an ETF.
issue | maturity range | today |
---|---|---|
national | 10 year | 2.80 |
national | 20 year | 3.80 |
national | 30 year | 4.10 |
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