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CIP Quips

A Taxable Equivalent

Did you know…

Capital markets are expecting the Fed to raise rates two more times in 2017, and while it appears that the Fed is committed to a path of steady rate hikes, this would still only end the year with rates in the range of about 2.70%. With yields remaining low, the thirst for higher coupons can be sidelined by potential tax implications.  

When looking for a tax free bond alternative, many investors turn to municipal bonds.  According to FMSbonds, the national inventory of 10 year maturity issued municipal bonds offer the following yields to maturity:  AAA rated bonds are offering 2.05%, AA rated bonds are offering 2.20% and A rated bonds are offering 2.55%.

Now look at the chart below which shows how much more an investor would have to earn with a taxable investment to equal the return of a tax free investment. 

2017 Taxable Equivalent Yield Table for National

The chart to the above shows how much more you will have to earn with a taxable investment to equal the return of a tax-free investment. To use the chart, find your taxable income and read across to determine your tax rate and the taxable equivalent of various tax-free yields.

Source: Nuveen

 

What are we thinking?

When choosing an investment based on tax consequences, it’s important to weigh the value of potential tax savings against your investment goals and ask if you are getting the best return for your money. Does it make sense for your portfolio to encompass tax free municipal bonds yielding 2.05%, or taxable fixed income, such as CIP, yielding 3.42%? Depending on your investment goals, higher yielding taxable investment grade corporate bonds may make more sense, even for those in higher tax brackets, in this current rate environment. CIP maintains a shorter duration, with a significant portion of the portfolio set to mature in the next few years, in order to take advantage of (hopefully) higher interest rates.

At Roosevelt, we believe active management of credit quality and duration along with diversifying your portfolio can lead to higher yields and income stability in rising rate environments.



This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages domestic equity, international equity, domestic fixed income, global fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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