Why is there a point to munis?

[Rich Carreiro]

Why is there any point to munis?

By that I mean, why aren't yields driven down to be equal to
the after-tax yields of taxable bonds of similar maturities
and credit quality?

Obviously they are driven down somewhat, but why aren't they
driven down to the point of indifference?

 

[Avrum Lapin]

Why is there any point to munis?

By that I mean, why aren't yields driven down to be equal to
the after-tax yields of taxable bonds of similar maturities
and credit quality?

Obviously they are driven down somewhat, but why aren't they
driven down to the point of indifference?

The "market" thinks that there is a greater risk than the S&P/Moody
ratings imply.

A study I did about 6 years ago showed a wider variataion between YTM
for corporate bonds with the same ratings and maturity than I might have
thought.

 

[Tad Borek]

Why is there any point to munis?

By that I mean, why aren't yields driven down to be equal to
the after-tax yields of taxable bonds of similar maturities
and credit quality?

That would only be expected if both muni & corporate bond yields were
set by the demand from taxable individual investors in the US. US
individuals are most of the market for munis, and very little of the
market for corporates.

-Tad

 

[Xho Jingleheimerschmidt]

Why is there any point to munis?

By that I mean, why aren't yields driven down to be equal to
the after-tax yields of taxable bonds of similar maturities
and credit quality?

Obviously they are driven down somewhat, but why aren't they
driven down to the point of indifference?

Given the near-infinite range of tax situations that people can find
themselves in (or predict themselves to be in), and the similar range of
opinions on what the true credit quality might be, how could we ever
know that the indifference point has or has not been reached?

Cheers,

Xho

 

[Beliavsky]

I have little to add to the other explanations of why the yield of municipal bonds exceeds the after-tax yield of corporate bonds for most investors. One implication of this fact is that it may be optimal to have muni bonds in your taxable account and stocks in your tax-deferred account, rather than stocks in your taxable account and corporate bonds in the tax-deferred account, as is sometimes suggested. You need to make some assumptions about future returns to solve the "asset location" problem. I wonder if there are online calculators that do so.