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Hunting for Yield? Target These 3 Municipal Bond Funds

Investors' rush to bail munibonds is creating some values

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fund185Investors’ hunt for yield is a hunt that rarely loses momentum. It has led to lofty values in such asset classes as dividend-paying stocks, as well as various bonds and bond funds.

Now that interest rates have moved up, however, some investors are fleeing municipal bonds anticipating carnage in the asset class. Funds holding municipal bonds continue to see huge outflows, with $11.8 billion leaving the sector in August, according to Morningstar estimates.

However, the municipal bond market is certainly not as liquid as the stock market, so all this rushing for the exits might be creating some values.

The fact remains that bonds are necessary for portfolio diversification, and many investors in higher tax brackets can benefit from the fact that all income is free of federal taxation. For instance, the Vanguard High-Yield Tax Exempt (VWAHX) sports a yield of 4.3% based on last month’s distribution and closing share price, which means an investor in the 33% tax bracket would have to find a taxable bond yield of 6.4% to match this payout.

Predicting the future of interest rates is way above my pay grade, but the attractive yield offered by some of these municipal bond funds is quite compelling. Also, funds that specialize in intermediate-term bonds have appeal from a yield perspective, but are not as sensitive to rising interest rates.

Here are three funds to consider:

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