RIP TINA. Municipal Bond Yields Are Near 14-Year Highs. VTEB A Quality Choice

RIP TINA, there are alternatives. Gone are the days of being forced into risky stocks in order to earn a decent rate of return. Investors can look to the fixed-income market for robust yields. There’s a great and simple chart put out daily by WisdomTree that shows current index yield to worst figures on the y-axis along with modified durations on those same indexes on the x-axis. It’s a helpful visual for the current state of the bond market and what yields investors can earn right now.

By taking some interest-rate and credit risk, you can buy high-quality corporates with a yield near 6% and a duration under 8. Treasurys, too, sport impressive rates compared to the last decade-plus.

U.S. Bond Market Snapshot For Investors

One area that investors sometimes overlook is the municipal bond market. This tax-advantaged niche of the fixed-income world offers high-tax-bracket folks, and those residing in a state with a significant income tax, the potential to earn a high tax-equivalent yield. According to J.P. Morgan Asset Management’s September Guide to the Markets, the muni tax-equivalent yield curve shows rates upwards of 7% or more.

That means filers in high-tax states who are in the top marginal bracket can get an equity-like return with little risk of default. Of course, the further you go out on the duration curve, the more interest rate risk you take. The upshot is that states are generally in good positions to repay amounts owed to municipal bondholders.

Big Tax-Equivalent Yields Available, High-Quality Debt

The yield today on high-rated muni debt is near the highest since 2008, according to Yardeni Research. A great way to gain exposure to the space is through a low-cost index ETF offered by Vanguard.

AAA Muni Yields: Near 14-Year Highs

The Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB) aims to track the performance of a benchmark index that measures the investment-grade segment of the U.S. municipal bond market. The fund employs an indexing investment approach designed to track the Standard & Poor’s National AMT-Free Municipal Bond Index using a sampling technique to closely match key benchmark characteristics, per Vanguard.

The fund has $18.0 billion assets under management and the 0.05% annual expense ratio is pretty low. The ETF pays a 3.54% SEC yield, according to Vanguard. The portfolio holds more than 6,000 individual bonds with an average yield to maturity of 3.2%.

Its duration, a measure of how sensitive a bond or bond fund is to interest rates, is 5.7 years. That means for a 1% parallel shift in the rate curve, VTEB will move up or down 5.7% depending on if rates drop or rise, respectively. VTEB is considered a high-quality, moderate-duration fixed-income fund.

Looking at VTEB’s portfolio, it is 21% AAA and 54% AA. Since it is an investment-grade product, there are no material positions in bonds rated BB or worse. Maturities are mainly in the 5-to-30-year range. Distributions are paid monthly, and the most recent dividend was $0.098 paid on October 6.

VTEB Portfolio: Investment-Grade Holdings

VTEB is a solid choice for muni market exposure given its high liquidity and low annual cost. But could there be higher yields in the offing? To put it another way, is there a risk of lower prices on VTEB in the near term? Let’s look at the chart.

The Technical Take

While some might scoff at the idea of using technical analysis on fixed-income ETFs, prices indeed trend on bonds, too. I see a breakdown below the key $49 to $50 range on VTEB. Also, notice the big volume surge this year.

If the fund can climb above $50, that would signal the potential to capture capital gains (which are taxable, by the way) along with a decent yield. The good news is that even if the fund remains below resistance, and even if it trends modestly lower, you can capture a net gain through its income payments.

I’d like to see the muni market stabilize before going all-in. Buying in increments could be a good play in case the trend continues down on VTEB.

VTEB: Muni ETF Falls Below Support On Big Volume

The Bottom Line

The bond market offers much better yields these days. High-tax-bracket individuals and couples should strongly consider owning muni bonds now. VTEB can be a good vehicle. Still, the trend is lower, and buying periodically could be a prudent move.