However, as the credit crunch has eased and the flight to U.S. Treasuries has been halted, we’ve seen a much different picture so far this year. The chart below compares the year to date performance of the 7-10 Year Treasury ETF (IEF) with the intermediate National Municipal Bond ETF (MUB). Treasury investors have a lot on their mind with supply concerns, inflationary pressures that could build in a few years, and now, dare I say, potential downgrade concerns. And while municipal investors may have their own default concerns as states battle budgetary problems, investors have clearly felt more comfortable in that space recently since munis have handily outperformed Treasuries this year.
It is generally assumed that investors will own Treasury bonds in tax deferred accounts and muncipal bonds in taxable accounts, in order to maximize after-tax returns. But the last year and a half has really shined a light upon total return investing in bonds. The huge return differentials over multi-month periods argue for a more actively managed approach to managing bond portfolios, which is our strategy here at Pinnacle.
