Delaware Municipal Bonds: Boring in the Best Possible Way
By Paul Rubillo ·
If you live in Delaware like I do, the state's own municipal bonds deserve a spot on your radar, and the reason starts with taxes in mind.
Municipal bond interest is generally exempt from federal income taxes, and generally exempt from state income taxes if the issuer is from the investor's home state. Delaware munis are tax-exempt to Delaware residents, while munis from other states are taxable to them. Buy a Pennsylvania Turnpike bond and Delaware still takes its cut.
Here's why that matters. The state just sold $446 million of bonds in May, and the 20-year piece funding new capital projects was awarded at 3.41%. Assume a 24% federal bracket and Delaware's top rate of 6.6%, roughly 30.6% combined. The taxable-equivalent yield works out to 3.41% ÷ (1 − 0.306), or about 4.9%. A taxable bond would need to pay close to 5% to leave you in the same spot after taxes.
Delaware's bonds have received top ratings from Fitch, Moody's, and S&P Global for 26 consecutive years. That's not a typo! Twenty-six years. The appeal here is safety, predictability, and the tax break. It's also your own backyard, since the proceeds are financing public school construction, projects at the University of Delaware and Delaware State University, and the restoration of the Custom House in Wilmington.
Delaware is one of the 10 smallest issuers of municipal bonds in the country, with less than $10 billion outstanding. Small means fewer bonds to choose from and thinner trading, so expect wider spreads and plan to spread your money across issuers and maturities. The whole works especially well for higher-bracket investors. Typically, only investors in the highest tax brackets benefit from buying tax-exempt municipal bonds instead of taxable bonds.
Cheers to boring!