This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Best High-Yield Funds Tilt Toward Safe

NEW YORK ( TheStreet) -- High-yield, or junk, bond mutual funds are luring investors turning up their noses at skimpy yields on Treasuries and money markets.

Junk corporate funds currently yield 7.5%, according to Morningstar. But for richer income, consider high-yield municipal funds, which yield 5.4% tax-free. That's the equivalent of a taxable bond yielding 8.3% for someone in the 35% tax bracket. In contrast, the 10-year Treasury yield fell to as low as 3.38% this month.

Wary investors are demanding higher yields on the below-investment grade municipals partly because of the damage that occurred during the credit crisis. With leveraged investors dumping their holdings, high-yield municipal mutual funds lost 25% of their value in 2008.

Since then, the mutual funds have come roaring back, returning 31% in 2009. Now the rally in high-yield municipals has further to go, argues Timothy Pynchon, manager of Pioneer High Income Municipal (PIMAX).

Pynchon says that before the credit crisis, high-yield municipals yielded 125 basis points (1.25 percentage point) more than investment-grade bonds. As the crisis unfolded, the spread increased to 600 points. Now some high-yield bonds continue to yield 300 points more than investment-grade issues.

Eventually, prices of high-yield munis will strengthen and yield spreads will return to normal levels, Pynchon says. "We should see some price appreciation this year."

Pynchon says demand for municipals will remain strong because taxes are all but certain to increase next year when the Bush cuts expire. The top tax rate will rise from 35% to 39.6%. In addition, the health-care legislation imposes new taxes on high-income households. That will make the tax shelter of municipals more valuable and push up their prices.

While demand is growing, supplies of new issues remain tight, Pynchon says. Instead of selling tax-free bonds, many municipalities are turning to taxable issues, which have been subsidized under President Obama's economic-stimulus program. The resulting shortage of tax-free bonds is helping to prop up prices.

Make no mistake, high-yield municipals come with risk. Many low-quality issues are backed by corporations, such as airlines, or nonprofit operations, including private colleges. While default rates are minuscule for investment-grade municipals, high-yield bonds currently are defaulting at an annual rate of around 4.5%.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.02 0.00%
FB $104.07 0.00%
GOOG $683.57 0.00%
TSLA $162.60 0.00%
YHOO $27.97 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs