Transcripts

"Of Mutual Interest,"- John Waggoner, Mutual Fund Columnist at "U.S.A Today"

SUSIE GHARIB: In tonight's "Of Mutual Interest," the benefits of municipal bond funds. Here's John Waggoner, mutual fund columnist at "U.S.A Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Benjamin Graham, one of the great investors of our time, once compared the financial markets to a manic-depressive storekeeper. Sometimes, he'd demand $100 for an apple; other times, he'd give you a bushel for a buck. Today, Mr. Market isn't giving you much in the way of income from your mutual fund, with one big exception. He's giving you a great deal on tax-free municipal bond funds.

Muni bonds are long-term IOUs issued by states, towns and municipal entities, such as airports. Traditionally, munis yield less than comparable bonds issued by the U.S. Treasury. Why? Because you pay Federal income taxes on income from Treasury securities, but you don't pay Federal taxes on munis. Normally, munis pay about 15 percent less than Treasuries. Not now, a 10-year Treasury note yields 3.4 percent; a 10-year, high- quality muni yields 3.66 percent. So, if you buy muni bond funds now, you'll not only get a higher yield than you would from a government securities fund, you'll get much higher yields after taxes.

Nothing is free, of course. You're getting higher muni yields because investors are worried that muni defaults will rise in a recession and that's true. In addition, the companies that insure munis against defaults are themselves looking troubled. But muni defaults are very rare and if you invest in a diversified muni fund, you'd be pretty well protected. It's in your best interest to look for a fund that invests in high-quality bonds, as well as one that keeps its fees to a minimum. After all, the more your fund takes, the less you have. And right now, because Mr. Market is feeling generous, you want to take as much muni bond interest as you can. I'm John Waggoner.