Muni Bonds Weather the Storm

Now here are the tax advantages of that muni bond using the same example: If you are in the 35% tax bracket, the tax-equivalent yield for this particular muni is 6.69%. (To calculate yield equivalence, divide the tax-exempt yield, in this case 4.35%, by one minus the investor's tax rate, 35%; in other words, divide 4.35% by 0.65.) So on a tax-adjusted basis, you would have to buy a 30-year Treasury yielding 6.69% to match the tax-free returns on a similar muni bond yielding 4.35%. That's tough to do with Treasury bonds yielding something like 4%-4.5%.

Finally, bond strategists say the nation's growing economy means higher tax revenue to service both old and new municipal debt. So what the hurricane knocks down, a growing economy will put back up.

"Municipalities' credit has improved with higher tax revenues and lower deficits over the past year," says Merrill's DiMella. "They are in a far better shape nowadays."

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