Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Preface

According to a recent Pew Center study, the 65 and older population cohort in the United States will grow by 33.61 percent from 2010 to 2020, compared to a rise of only 13.06 percent in the preceding decade. Furthermore, 70 million baby boomers are poised to enter retirement and live off unearned income. From an investment standpoint, this well-documented aging of the American population implies an ever-increasing need for stable fixed income and a gradual shift away from the potential volatility of the equity markets. Yet, securing an adequate level of interest income has never been a more daunting task than in the current market environment.

In the aftermath of the greatest financial crisis since the Great Depression and the ensuing economic slowdown, the Federal Reserve Bank has embarked on an unprecedented monetary-easing strategy intent on rekindling the economy and encouraging risk-taking. By keeping short-term rates artificially low for “an extended period of time” (in its own words), the Fed has pushed interest rates down to record low levels: At this writing, the yield on 10-year Treasury notes is hovering around 2.00 percent (below the historical low of 2.48 percent reached in December 2008, at the very depth of the financial crisis).

The search for adequate income has also become more challenging in the municipal market, long a refuge for higher-income-bracket investors seeking a combination of perceived “safety” and attractive tax-exempt income. The same economic ...