Traditionally, fixed income investors seeking the highest after-tax yield have tended to invest exclusively in municipal securities. That approach has often made sense, particularly during periods when interest rates were higher. However, in today's more volatile and low-interest-rate environment, we believe that seeking the best available after-tax yield and after-tax total return requires looking at all available fixed income asset classes, both tax-exempt and taxable.
In many instances, purchasing a taxable security can provide a better return than a tax-exempt security, even after paying taxes. Certain sectors within the taxable market can offer after-tax yields that are similar to or higher than comparable municipal securities. Moreover, actively allocating away from expensive asset classes to those that we feel offer better value can potentially increase the after-tax total return of the portfolio as well. Our crossover strategy considers all available fixed income asset classes—tax-exempt and taxable, including at times high-yield, preferred and sovereign securities—designed to achieve the highest after-tax yields and after-tax returns in a way that is tailored to each client's particular needs.
1Barclays Municipal Securities Index, 2012.
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This report is provided for informational purposes only and was not issued in connection with any proposed offering of securities. It was issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. The information in this report was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions herein are those of U.S. Trust, Bank of America Private Wealth Management, are made as of the date of this material, and are subject to change without notice. There is no guarantee the views and opinions expressed in this communication will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending and/or other commercial relationships with Bank of America and its affiliates. All charts are based on historical data for the time period indicated and are intended for illustrative purposes only.
This publication is designed to provide general information about economics, asset classes and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual's facts and circumstances. Always consult with your independent attorney, tax advisor and investment manager for final recommendations and before changing or implementing any financial strategy.
Other Important Information
Past performance is no guarantee of future results.
All sector and asset allocation recommendations must be considered in the context of an individual investor's goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.
Diversification does not ensure a profit or protect against loss in declining markets.
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop and vice versa.
There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Tax-exempt investing offers current tax-exempt income, but it also involves special risks. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. Interest income from certain tax-exempt bonds may be subject to certain state and local taxes and, if applicable, the Alternative Minimum Tax (AMT).
Mortgage-backed securities are subject to credit risk and the risk that the mortgages will be prepaid, so that portfolio management may be faced with replenishing the portfolio in a possibly disadvantageous interest rate environment. Any capital gains distributed are taxable to the investor. A portion of the income may be taxable.
Investments in high-yield bonds (sometimes referred to as "junk bonds") offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a junk bond issuer's ability to make principal and interest payments.
Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. Government.
The credit quality ratings represent those of Moody's Investors Service, Inc. (Moody's), Standard & Poor's Corporation (S&P) and Fitch, Inc. (Fitch). The ratings represent their opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The security's credit quality does not eliminate risk. For information regarding the methodology used to calculate the ratings, please visit Moody's at www.moodys.com, S&P at www.standardandpoors.com, or Fitch at www.fitchratings.com.
Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the "Bank") do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank.
ARA6Y6O5 | 6/2012