For New York City residents earning between $90,000 and $500,000, the income tax rate during 2011 was 3.648%. Using that rate and the above state tax rate, the taxable equivalent yield is 4.90%. Even without considering the tax advantages, the yield on the New York Triborough Bridge and Tunnel Authority bond is higher than some corporate bonds with the same investment-grade ratings. An IBM ( IBM) bond rated Aa3/AA- with a coupon of 1.875% expiring on August 1, 2022, was trading Friday at a yield of 2.35%. Why would a corporate with the same rating trade at a yield only slightly higher than a muni of the same quality? The answer is that the market has been rough for municipal bonds, because so many municipalities are having budget difficulties, and some analysts, including Meredith Whitney in September 2010, expressed fears that there could be a significant number of municipalities defaulting. There have been a few defaults, but nothing like the "hundreds" of defaults that Whitney expected. The New York Triborough Bridge and Tunnel Authority bond example cited above is for a new issue, and it's too late to get in on that one. Municipal bonds are thinly traded, being snapped up immediately by institutional investors and individuals when they are issued. The best approach is to talk to your broker, request information on upcoming municipal issues, and try to make purchases "off the shelf," which may be your only way of making these investments.
Municipal Bond Funds
You can also consider a municipal bond fund. Of course, since bond prices move in the opposite direction of interest rates, holding shares in a municipal bond fund can require a lot of patience, as you watch your share price drop while rates are rising. But if your long-term objective truly is to generate current income, you should be able to stay committed and ride out the price fluctuations over the years. TheStreet Ratings provides free ratings for all exchange-traded funds trading on U.S. exchanges that have operated for one year, and also for open-ended funds that have operated for three years. The ratings evaluate and measure ETFs and funds according to variables which include the Fund Family, Fund Style, Performance, Net Assets and Expense Ratio.