Rob Tayloe discusses fixed-income market conditions and offers insight for bond investors.
Many questions should be addressed when figuring out what bonds to purchase for your portfolio, including:
- What is risk tolerance?
- What is the time horizon?
- What are the federal and state (local) tax brackets?
- Are the bonds being purchased in a qualified (IRA…) or taxable account?
Answering these questions and other questions (this is just a small list) will provide the answers you need to figure out what bonds are most appropriate for that account.
The Fixed Income Solutions associates work closely with financial advisors to use these questions and other questions to identify the best opportunities to meet clients’ personal goals and cash flow needs. Plus, Raymond James has tools to show what securities make sense in various situations. The “Curve Comparison” graph illustrates that different bond types have diverse yields (with tax rates considered) at different points on the curve. Within 12 years, BBB-rated corporate bonds currently maximize income regardless of tax bracket. For clients in high tax brackets, tax-free municipal bonds may make the most sense in bonds with maturities greater than 12 years. Clients in the highest federal tax brackets can achieve greater than 7.0% taxable-equivalent yields on the long end of the curve. The tax-free benefits can sometimes be amplified for clients residing in states with a high state income tax when in-state bonds are purchased, thus avoiding state tax too. The process of identifying optimum yield pockets through curve comparisons may help meet the objective to maximize return within personal investing parameters.
Some investors have an affinity for certain bond types (like municipal or Treasury bonds) because that is “what they have always done.” At the end of the day, it is usually important to maximize after-tax income while staying within the investor’s risk tolerance regardless of biases. Digest as much information at your disposal in order to make the best possible decision for you. For instance, Treasuries or CDs can make sense for conservative investors who are parking money short term. Treasuries are exempt from state income tax, so they can enhance after-tax yield for investors residing in a state with an income tax. The benefit increases proportionally for clients living in states with higher income-tax rates.