By Larry Lane for Investorzoo.com Let’s face it; it’s tough to get high yields in bonds in our current economic environment. The 10 year bond is currently trade at 3.66%. This means you’re willing to tie up 10 years of possible growth for a return of 3.66%. While there is virtually no risk of default if you hold until maturity, your reward is barely outpacing inflation after you pay your taxes. If you are looking for slightly better returns, consider some alternatives to US Treasury bonds. Federal Agency bonds Federal agency bonds offer an opportunity to increase yields without increasing risk too much over US Treasury bonds. While agency bonds aren’t backed by the US Government, it would be hard to imagine the federal government letting an agency default. That being said, one doesn’t need to go far to remember the debacle of Freddie Mac and Fannie Mae to recognize that no security is 100% safe. Maturity of these bonds ranges from one to thirty years and can be purchased in increments of $1,000. Interest from most of these agencies is tax exempt from federal and state income taxes. It is for these reasons high net worth investors and those with high incomes benefit the most from these types of investments. Municipal bonds Municipal bonds or â€muni bonds†are issued from states, cities or local municipalities. Like federal agency bonds, municipal bonds are federal and state tax free. Those individuals in a high income tax states and high income earners may find municipal bonds a good investment due to their tax free nature. These bonds are rated by Standard and Poor’s and Moody’s. Municipal bonds come into two categories: 1) General obligation bond: These bonds are based upon the municipalities’ ability to collect taxes 2) Revenue Bond: Bondholders of this type of investment will only be paid based upon the revenue the project generates. Examples of a revenue bond would include a bond offering on a bridge project or electrical plants. The interest rate a bond pays will depend on the credit worthiness that the rating companies assign. As with all investments, the higher the risk the higher the interest rate you can expect to receive. You can purchase these bonds through a broker, much like you would a stock. You will not receive the actual bond, but a book entry; marking you as the owner of record of the bond. Before purchasing any bond, you should ask for an official offering report. This report will give you financial details of the municipality or bond project you’re financing. In effect, you are lending a municipality or agency money. Unfortunately there are no standard reports for bond issuers to follow unlike a public corporation. If you’d like to spread your investment risk, you can purchase municipal and federal agency bonds through an ETF or mutual fund for additional portfolio protection. Since interest rates fluctuate, the value of your bonds will as well. If you are forced to sell before maturity, you may see a net loss or gain on your investment. As always, please consult your financial advisor to see if bonds fit in your portfolio and investment strategy. The article above is information of a general nature and the information provided may not apply to your personal situation. Please consult your financial planner or licensed professional for investment advice.
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