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4 Big Reasons Why Short-Term Muni Bonds Should Excite You

Mar. 07, 2018 5:21 PM ET3 Comments
Frank Holmes profile picture
Frank Holmes


  • Munis mean tax-free income!
  • New tax law has actually boosted demand for munis.
  • Munis are calm in times of rising interest rates.
  • Munis are calm in times of market turmoil.

4 Reasons why short term muni bonds should excite you

Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin.

That doesn’t mean investors should disregard short-term munis. In fact, munis play a very important role in any serious portfolio. Below are four big reasons why you should get excited about muni bonds.

1. Tax-free income!

As you might already know, muni bonds are debt instruments used primarily to finance state and local infrastructure projects. When policymakers introduced them in 1913, they wanted to make sure investors were amply incentivized to participate. To that end, the decision was made to reward muni investors with tax-free income at the federal level and, in many cases, at the state and local levels.

For residents of high-tax states such as California, New York, Oregon and others, this feature should be especially appealing.

Even if you don’t live in one of those states, munis can help you preserve—and therefore compound—more of what you earn. Who doesn’t like getting something for nothing?

2. New tax law has actually boosted demand for munis.

But wait! Doesn’t the recently signed tax overhaul tarnish munis’ allure? Not so fast.

The new law, which went into effect January 1, caps the state and local deductions taxpayers can take at $10,000. That makes municipal bonds even more valuable as a portfolio diversifier, particularly for households with hefty tax bills.

Healthy inflows so far this year suggest demand for munis remains strong. For the week ended February 21, muni bond funds, including mutual funds and ETFs, took in $347 million of net new money, raising overall net inflows for 2018 to $6.8 billion.

It’s still early in the year, but this puts the muni market on track for the fifth straight

This article was written by

Frank Holmes profile picture
Frank Holmes is a Canadian-American investor, venture capitalist and philanthropist. He is CEO and chief investment officer of U.S. Global Investors, a publicly traded investment company based in San Antonio, TX, that oversees more than $4 billion in assets (Nasdaq: GROW). He is known for his expertise in gold and precious metals and launching unique investment products. Holmes also serves as executive chairman of HIVE Blockchain Technologies, the first publicly traded cryptocurrency mining company (TSX.V: HIVE).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (3)

The short duration is not much of an issue assuming you hold until maturity - which is likely for a 1- 2 year maturity.
I think you may have missed the primary reason to go short - that is where the greatest value is on the muni yield curve. Also, in a rising rate environment you will most likely have the opportunity to reinvest maturing bonds at a higher rate.
After a year of RELENTLESS declines, short term munis may have bottomed. The man is a market timing genius.

I've been very excited about short-term munis for the past year, and even more so today. You have hit the nail on the head with this article, on all points. Additionally, for IRA investors, there is a good population of taxable munis, which are also very low volatility at the short end of the yield curve and offer very good rates of return, with the same stability/safety as tax free munis.

Investors who have accounts which are relatively large should take the time to learn more about munis, and about the benefits above investing in muni and bond funds in general.

Invest in munis, and create a short-term ladder. As bonds mature, roll them out to new short-term ones at higher rates. Continue and ride interest rates higher.
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