Municipal Bond ETFs Offer Attractive Rates

One beneficiary of the Treasury’s takeover of Fannie Mae and Freddie Mac is Treasury bond exchange traded funds (ETFs).

Treasuries advanced on Tuesday, pushing yields down, as concerns about the health of the banking system here pulled investors back to the safety of government debt, reports Deborah Levine for MarketWatch. It didn’t help that this morning, concerns arose over the ability of Lehman Brothers (LEH) to raise capital.

Traders are noting that Treasurys still face pressure, as the government may have to issue more debt in the coming quarters to support the mortgage agencies.

Some Treasury bond ETFs include:

• iShares Lehman TIPS Bond (TIP), up 5.2% year-to-date
• iShaers Lehman 20+ Year Treasury Bond (TLT), up 7.1% year-to-date

Municipal bonds and the ETFs that focus on them are one of the most popular and interesting investments for 2008. Eileen Ambrose for The Baltimore Sun explains that investors in high-income tax brackets favor the bonds because the interest income generated is exempt from federal taxes and, in some cases, state taxes. Investors also flock to municipal bonds for safety.

Bond insurance is now an issue, as this is what guarantees the interest payments and principle on bonds in case of default. Muni-bond insurers in recent years have gone and started insuring riskier securities that involve the subprime mortgages. You can guess where that led, and now issuers are offering a higher rate on bonds to attract investors. Lucky for some investors, bond yields are up.

ETFs offer good access to municipal bonds, as they track a benchmark of bonds and they can be broken up and traded through out the day. Some of the many available municipal bond ETFs are:

• SPDR Lehman Municipal Bond ETF (TFI), up 2.1% year-to-date
• PowerShares Insured National Municipal Bond Portfolio (PZA), down 1.4% year-to-date
• iShares S&P National Municipal Bond Fund (MUB), up 1.9% year-to-date

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