Feeling taxed? What you need to know about munis

With markets volatile and tax bills coming due, investor anxiety is running high. Peter Hayes launches the first in a series of charts aimed at offering some solace (and an ode to municipal bonds).

It’s tax time and investors have any number of reasons to feel stressed: Equity markets are jumpy, bond yields have been defying expectations (again), global growth is disappointing, oil is on a slippery slope and, of course, taxes are eroding your income.

Fortunately, we’ve got a chart (and some solace) for each of these. We’ll offer up one each week, now through the tax-filing deadline of April 18 (that’s right, three extra days in 2016, thanks to Emancipation Day closing IRS offices on Friday, April 15).

Our first installment focuses on the question that hits home right about this time every year: Are taxes taking too large a bite out of your investment income?

There’s one asset that can help ease that pain: municipal bonds. Munis seek to provide income that is free from tax (if they are not entirely tax free; federal, state, local, then we can’t say tax free), so you keep more of what you earn. These high-quality fixed income assets seek to provide higher yields than other bonds after taxes (and recently longer maturities have been outyielding Treasuries even before tax). The difference can be meaningful, and is not limited to the highest tax brackets. In today’s low-rate environment, even investors in the lowest tax bracket derive an income benefit from municipal bond tax-exemption.

The benefits of tax-exemption evident across tax brackets

munis and yields

 

Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog.

Investment involves risk. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 14, 2016, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader.

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