Wednesday, October 08, 2008

Municipal Bonds Funds Yielding Over 4%

Periodically, I check our accounts to ensure we are getting good yields on cash portion of our investment accounts. Typically, for taxable accounts, we keep cash in a municipal bond fund. For tax exempt retirement accounts we use a money market funds.

Usually, money market funds are paying 30 to 50% higher interest than municipal bond funds. Imagine my surprise when I discovered that the reverse is now true, municipal bond funds are yielding over 100% more than money market funds. For example, my money market funds are yielding about 1.7% and my municipal bond funds are yielding about 4.1%.

To make sure the information I read was correct, I called several brokerages and confirmed my findings were true. One broker explained that it was probably due to a large amount of municipal bond selling by investors that lowered the prices, and, therefore, increased the yield. Another reason might be that new offerings need to have higher interest due to the current credit crisis.

Whatever the reason, I'm going to enjoy getting over 4% tax free. However, I am not going to add any more money to these funds, in case it turns out to be one of those events that's too good to be true :-)

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

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