Kiplinger’s Personal Finance: The tax-exempt train rolls on | Business News

Tax-exempt bonds are also in the green.

Dreamstime / TNS

The obvious source of positive returns on bonds during the robust economic rally in 2021 is high-yield bonds or junk, a category that has always been known to forego rapid growth and booming oil prices.

But tax-exempt bonds are also, as usual, in the green.

The numbers for 2021 are not spectacular. For example, a bundle of broadly based municipal indices rose by 0.5% to 1%. (Returns are possible until June 4th.)

Even so, the prices of municipal bonds are nowhere near as sensitive to interest rate hikes as government bonds or corporate bonds. There is less trading and more municipal bondholders staying in price until maturity, so prices are stickier until interest rates rise seriously.

And the perception now is that high-income investors should expect big income tax hikes, so they’re frantic for accommodations and tax-free bonds are easy to buy.

But tax talk is always a questionable explanation for the success of municipal bonds.

It seems that many investors just don’t want tax liability when it’s optional. It doesn’t matter if your personal tax rate is low, you live in a state with tax havens, or if Congress puts you in a combined 50% state and local class.

Also, it doesn’t matter if the yield on tax-free bonds is abnormally low compared to what’s available from taxable debt – which it is now, with Triple-A-Muni yields at near record lows compared to 10-year government bonds . In some asset classes this would trigger a profit taking and rebalancing breakout. Not here. Repeat: people. Just. Hate. Taxes.