It sounds like something you'd hear while watching a British sports broadcast. Or, alternatively, "MOB Spread" would make a pretty good name for a '90s rap group. The 1994 summer tour featuring A Tribe Called Quest and MOB Spread!
Municipal bonds are debt instruments issued by local governments. They are used to fund things like public pools and fire houses and Harvest Day parades. The muni market has an advantage over other types of bonds, in that the federal government tax-exempts income generated from muni bonds.
Meanwhile, Treasury bonds are another special category in the bond market. They represent debt instruments issued by the U.S. federal government.
Treasuries get used to fund bombers and Medicare and Fourth of July fireworks. They don't have a tax incentive built in, but treasuries are considered among the world's safest investments. Investors generally feel the chance that the U.S. government will default on its debts as a pretty remote possibility. That makes Treasuries the place to hide when other markets get scary.
The municipals-over-bond spread takes advantage of these special categories to provide some information about market attitudes toward taxes. (Government bonds are taxable; munis are not.) To determine the spread, you take the yields from municipal bonds and compare them to the yields on Treasury bonds with the same maturity. You are comparing a tax-exempt yield with the safest yield (and therefore, likely the lowest yield you'll get in the bond market).
The MOB spread also provides some information about how the market perceives callable and non-callable bonds at a given time.
Muni bonds are callable, meaning that, under certain conditions, the local government that issued the bonds can buy them back from the holders. They can call them in, as it were.
Treasury bonds don't have that option. Once you buy one, the federal government can't buy it back. You have it until maturity, unless you sell it to third party. Thus, investors can use the MOB spread as a way to track (and attempt to profit from) changes in market responses to interest rates, with the different tax status and callable options playing a role in the differing yields on similar maturities of muni bonds and Treasuries.
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Finance: Who buys muni bonds?1 Views
Finance allah shmoop who buys communi bonds who buys them
rich people or rather people earning enough active income such
that their marginal tax rates are very high Munich bonds
are tax free so in practice they tend to offer
lower net yields than taxable corporate bonds Okay so what's
the math here Well if your ah high earner i'ii
europe bo tox correction surgeon or an ambulance chasing attorney
from new york Or an all star nfl linebacker with
no felony drug or spousal battery convictions Yeah a few
of those actually do exist Well then it's likely that
you pay the highest marginal tax rates They seem to
change every election cycle so will generalize here so we
don't have to redo this video every two to four
years At the highest rates you'll pay about thirty five
percent federal tax and twelve ish percent state tax and
usually an override for some other political initiative like obama
care or the wall fund or the no child left
behind fund at the zune fund Beyond those total them
up And let's say you pay fifty percent marginal tax
on your last in a few million bucks in earnings
and let's also say for illustrative purposes here assumed that
the bonds we are comparing our of equivalent risk and
duration compared with these immunities right Let's say so They're
both a rated and they come due in on a
half a dozen years Well the corporate bonds than yield
us a seven point two percent and the parallel nooni
bond yields four percent So then which bond has the
higher value to its high tax paying owner Well if
you're paying fifty percent tax on the seven point two
percent corporate bond than you the nun convicted linebacker pay
net after tax fifty percent of seven point two percent
interest or three point six percent The munich carries no
tax so it's gross is net meaning the four percent
yield of them unibond produces point four percent a year
Better yield after taxes then does the corporate bond So
what if you were a sir school teacher not rich
paying this a twenty percent marginal tax instead of fifty
Well then you'd go for the corporate bond It yields
gross seven point two percent But after your twenty percent
tax the yield after tax on that corporate to you
mrs whitehead homeroom number fourteen teacher of health and sex
ed to simply horny teams Yes your yield then is
point eight times seven point two or five point seven
six percent way higher than the muniz yield of four
percent The differences here in yield from a corporate versus
immune e maybe don't seem like a lot but over
time they really add up So once you make your
first one hundred million or so don't forget teo you
know come back and watch this video It'll be here 00:02:41.48 --> [endTime] for you
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