Most people today view the stock market with all the same affection as an angry cobra. Worried about the volatile and unpredictable nature of the market they’re looking for safer ways to invest their way through the economic downturn. While bonds have long been the alternative to turn to in such a scenario even that market is not without its dangers. That’s why today I am steering responsible investors towards another means of a “fixed, secured income stream”.
While the bond market is often called the fixed-income market, that’s not because bond traders live on a fixed income themselves. It earned the moniker because a bond pays a fixed interest rate for its lifetime. But fixed interest doesn’t tell the whole story. Bond prices fall when interest rates rise, and interest rates are currently at levels not seen since the Kennedy administration. Rates could certainly fall a bit more, but most of the downward move has already happened.
So what is an investor looking for a “fixed income investment” to do? Buying a ten-year Treasury note will lock in very low interest rates for a very long time. Buying a bond fund runs the chance that the fund’s share price will fall over time. Instead, if the mortgage has already been refinanced — at this point it’s safe to assume that many have been — seeking decent deals in the fixed-income market is the single best thing for investors to do. So forget Treasuries and municipal bonds.
Normally, a municipal bond carries a lower yield than a Treasury bond. This is because municipal bonds are free from federal income taxes. If a ten-year Treasury note carries a 3.88% yield, municipal bonds can usually be expected to yield about 1.5% less, or 2.3%.
Under normal circumstances investors would have to be in the 28% tax bracket or higher to make municipal bonds worthwhile after taxes. Today however, treasury yields are unusually low because terrified investors have been snapping them up. In short, today’s circumstances are not normal.
While treasury securities are guaranteed by the U.S. government and are considered the safest investment on earth, municipal bonds have recently seen higher yields because of concerns surrounding state finances. Currently, municipal bonds yield about the same as Treasuries and because they are tax-free, they’re better deals.
With a 3.88% return on a municipal bond, or $388 a year on a $10,000 investment, the investor keeps the full $388. With a taxable bond at the same rate however — for an investor in the 27.5% tax bracket — $107 of that same return would go to the Federal government. To earn $388 after taxes, a taxable bond would have to yield 5.4% or more.
A Great Lakes Secured Fixed Income is also a consideration for achieving an even better return. A fixed secured note of $32,000 at 10% APR (interest only) for a 5 term would pay the note holder $267 per month. Over the 5 year term the note holder would receive a total of $16,000 in 60 monthly payments. That’s a 50% ROI. Plus, the original $32,000 principle is also returned at the end of the term.
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