Diversifying Your Asset Allocation with High-Yield Muni Bonds

Investors seeking higher yields without excessive risk should take a closer look at high-yield municipal bonds.

With yields on many familiar fixed-income assets remaining stubbornly low and equity valuations looking increasingly frothy, investors may believe they have few options when it comes to earning attractive returns without adding unreasonable risks to their portfolios. Having few options, however, is not the same as having no options. Often overlooked, high-yield municipal bonds may offer these investors a compelling alternative middle ground between the insufficient returns of other bonds and the risks of equities.

The high-yield municipal bond category typically includes bonds issued to fund entities such as toll roads and hospitals, as well as initiatives such as industrial development. As their name suggests, these bonds generally deliver higher yields than others typically found in the broader municipal-bond market, while sharing the same tax-exempt status; this gives them tax-adjusted returns superior to most other categories of fixed income and even approaches the taxable 6.3% return that BNY Mellon Investment Management forecasts US equities will likely deliver from 2017 to 2026. Over the 12-month period ending March 31, 2017, the Bloomberg Barclays Municipal High Yield Index has returned 4.31% vs. the Bloomberg Barclays Municipal Bond Index return of 0.15%.