Municipal-bond investors are paying a greater premium than should be expected for the “pleasure of not being taxed,” a new study finds, often negating the bonds’ benefit. In a perfectly priced world, a muni bond would pay interest equivalent to a Treasury bond minus the investors’ tax burden on the Treasury and adjusted for liquidity and credit quality of the issuing state or municipality. But munis pay investors even less than that, according to the study, which appeared in a National Bureau of Economic Research working paper in June. On average, the study found, the yield of the muni bonds was nearly 15 basis points, or 0.15 percentage point, lower than what would be explained by their favorable tax status. “Investors are willing to accept a lower interest rate on their munis, which is the same as paying more,” says Francis Longstaff, professor of finance at the UCLA Anderson School of Management and co-author of the research. “It’s like they’re paying an extra tax-avoidance fee” for munis, just as they’re willing to pay more for the safety of Treasurys, he says.
Source: WSJ.com: Markets
