2020_06_20 — “The Missing 1% in Munis -5, 4, 3, 2, 0”


The Missing 1% in Munis -5, 4, 3, 2, 0


  • Investors tend to prefer municipal bonds that pay coupon interest, the higher the better; 5% and 4% coupons are much more common than 3% and 2% coupons
  • Municipal bonds with a 1% coupon practically don’t exist; most of those that do were issued this year, and it is not even July yet
  • One percent coupon muni bonds will be more common the longer interest rates remain low; and rates will probably be low for a long while
  • When it comes to munis, don’t confuse current yield with yield to repayment; the current yield often looks more attractive because it is higher, but in a low interest rate environment current yield is mostly composed of one’s own principal paid back to oneself
  • Zero coupon bonds, though ugly to most investors because they have zero current yield, often have relatively attractive yields to maturity and no reinvestment risk


The municipal bond world likes high coupon bonds; seemingly the higher the better. U.S. municipal bonds, commonly known as munis, are bonds or debt obligations issued by U.S. states, local governments, or territories. Munis are often (but not always) issued to be free of state and federal income taxes and can be subject to a capital gains tax if a capital gain is realized. I reviewed the U.S. municipal bonds on Bloomberg, a popular professional bond and financial data platform that has the quirky feel of a 1990s era DOS (Disk Operating System) where one types in codes like {MSRC} to do a search. Of the nearly 940,000 muni bonds tracked:

  • 11,456 have a 6% or greater coupon
  • 224,881 have a 5% coupon
  • 160,565 have a 4% coupon
  • 147,914 have a 3% coupon
  • 59,216 have a 2% coupon
  • 20,971 have a 0% coupon; these are known as capital appreciation bonds or more colloquially as zero-coupon bonds
  • Only 531 municipal bonds have a coupon of 1%, the vast majority of them issued this year and most of them mature sooner than 2024



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Michael Ashley Schulman

Michael Ashley Schulman

Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm