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Fidelity is showing the following chart for current bond yield rates:

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For 1-year bonds, US treasure currently offers a 1-year yield of 4.62% which is above or comparable to:

  1. Corporate AAA/AA bonds: 4.71%
  2. Corporate AA bonds: 4.75%
  3. Municipal AAA bonds: 3.31%

Even Corporate BBB bonds (which supposedly carry much more risk) only offer a 5.68% yield. The question is... who is buying these bonds? Isn't it more rational to just buy US Treasure bonds if you can't earn a significantly higher yield from Corporate/Municipal bonds?

NB: It's possible that Fidelity is simply wrong about the yields but that's the best source I could find

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  • I've answered the muni part below. It's worth mentioning that there's currently another US government shutdown looming, so Treasuries might not be the slam dunk you think it is. As for the AAA corporates, it depends on the specific issuance. Some might even be supranationals rather than traditional corporates.
    – 0xFEE1DEAD
    Commented Dec 21, 2022 at 13:45
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    @0xFEE1DEAD if you believe that the shutdowns could realistically result in the US defaulting on their debt, I’ve got a bridge to sell you :-) Commented Dec 21, 2022 at 13:54
  • I always wondered something analogous: There's a Mobil gas station about a block away from a non-brand-name gas station, and their prices are about 10 cents/gal more. How do they stay in business? Because many customers value the name they recognize. The same goes with brand-name vs. generic drugs.
    – Barmar
    Commented Dec 21, 2022 at 15:16
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    Go look at the bonds themselves. The gap between the bid and the ask is huge. While someone might be offering them at that price, no one seems to be buying them at it.
    – jjanes
    Commented Dec 22, 2022 at 17:17
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    @0xFEE1DEAD: an appropriations lapse aka 'shutdown' does not interfere with US Treasury bond service and payment, which are covered by a permanent indefinite appropriation not a 'discretionary' annual one. It is debt limit impasses that often require 'extraordinary measures' to suspend some issuances and potentially even refundings, although never yet actual default. Commented Dec 23, 2022 at 3:06

4 Answers 4

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Isn't it more rational to just buy US Treasure bonds if you can't earn a significantly higher yield from Corporate/Municipal bonds?

Say you're a large fund, like California's state pension fund. CalPERS has $469 billion of assets. Going from 4.62% to 4.71% is 0.09% annual yield. If CalPERS is choosing where to invest $50 billion, that difference is $45 million. Not an insignificant amount of money, especially after a couple of years. As a taxpayer, you'd want that $45 million to be better used for, say schools or parks, rather than as a pension fund contribution.

For large institutional investors, taking time to evaluate even small differences in risk and return is worth it.

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Munis are tax-advantaged, so you'll need to factor in your tax rate to convert the quoted yield to a tax-equivalent yield you can compare to taxable securities.

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First: who said anyone is buying? If something is available for sale, it doesn't necessarily mean someone is buying.

Second, and more important:

A lot of investors and funds work based on a pre-defined investment plan. If their investment plan (prospectus) says they'll be investing 5% in BBB corporate bonds - then that's what they'll do. Similarly, funds and investors invest in munis (specific to location, since that's where they're tax exempt). This is common for managed mutual funds, various pension programs, insurances, etc. They also invest in treasuries, similarly - according to their predefined plan.

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There are actually quite a lot of variables in making decisions between bonds, and rather than delve into the myriad details; I'm just going to approach your question looking exclusively at why someone would buy bonds when they're comparable to US Treasury yields.

First, it depends on what you are looking to buy. According to TreasuryDirect.gov (read: the US Treasury) "You may purchase up to $10,000 each of electronic EE and I Savings Bonds, per person (individual or entity), each calendar year. Purchases of any other Treasury securities do not alter the purchase limits for electronic EE and I Savings Bonds."

So if you're looking for some yield, and have hit your limit; you're only alternative is to go into the private market.

Additionally, if you were looking outside of the Saving Bonds; then you hit another limit. "The limit for noncompetitive purchases is $10 million for each security type and term, for each auction. This limit applies regardless of whether you're buying a bill, note, bond, Floating Rate Note, or TIPS, and regardless of what method you use to make the purchase..."

Given the Bond market is vastly larger than the Equity market, you have far more money and participants sloshing about within this market; creating a vibrant secondary market that will have a material impact on the actual yield (not the coupon rate, and this of course assumes no manipulate in the bond market by the Federal Reserve). Since there are material limits to how much can be owned, it means to meet yield-needs; buyers have no other recourse but to go to other products.

Finally, there are some advantages to other products. For example, Municipal bonds can (depends on the offering) offer tax incentives. While Treasury bonds provide Federal Income tax exemptions on the income from the bonds, municipal bonds can extend that federal income tax exemption to also include State Income tax exemption.

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  • Note the $10 million limit is "noncompetitive" purchases. A noncompetitive bid guarantees the amount of security desired will be purchased, only the return is determined by auction. Large purchases would be competitive bids, which are like a regular auction where you can walk away with nothing. That limit is 35% of the offering.
    – user71659
    Commented Dec 22, 2022 at 19:47
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    Even if you can only buy $10m marketable at one auction there is plenty more in the secondary market. Treasury bond interest is NOT exempt from federal tax, except if paid at redemption on savings bonds used for qualifying education expenses; it is exempt from state tax, which is why bond funds provide information on or with your 1099s saying what portion, if any, of their distributions was from Treasuries. OTOH 'munis' (state and local) that aren't disqualified types like PABs are exempt from federal for everybody and from state if you reside in that state. Commented Dec 23, 2022 at 2:59

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