Gregory Serbe of Lebenthal Taxable Municipal Bond

We are typically classified as a corporate bond fund because the interest income from taxable municipal bonds is taxable on a federal level. However, there are certain states that exempt some of their taxable municipal bonds from state income tax. With all other things being equal, a municipal bond with a state tax-exemption will have a slightly higher price and lower yield than a municipal bond, which is subject to both federal and state taxes.

S&P: What are the fund's top sectors?

SERBE: As of Sept. 30: the largest sectors were general obligation, 24.7%; housing, 11.4%; airport revenue, 10%; pension, 6.9%; education, 6%; health care, 5.9%; stadium, 5.8%; federally insured hospital, 5.5%; dedicated tax, 4.8%; long-term care, 2.9%; lease back, 2.7% and tobacco, 2.4%.

S&P: What are the fund's other statistics, including current average yield?

SERBE: As of September 30, the fund's average coupon was 7.4%; current average yield, 5.6%; average maturity, 10.9 years; and average duration, 6.8 years.

Taxable municipal bonds tend to have higher yields than tax-free municipals because, among other things, the income is federally taxable, whereas the interest income from traditional municipal bonds is federally tax free. Because of this, taxable municipal bonds, like corporate bonds, trade on a relationship to the U.S. Treasury market.

S&P: Who purchases taxable municipal bonds?

SERBE: The buyers of taxable municipal bonds tend to be investors in a low-tax bracket, like retirees, or those looking for fixed-income investments for their retirement accounts.

Interestingly, over the past couple of years, large insurance companies that have traditionally purchased corporate bonds have started putting money into taxable municipals because they are becoming increasingly concerned with the event risk associated with corporate bonds, given the disastrous recent events with companies like Enron and WorldCom.

If a municipality gets into trouble, unlike a corporation, its services and infrastructure may be taken over by another entity. Obviously, a city cannot disappear. For example, when New York City got in trouble in the 1970s due to over borrowing, the State of New York formed the Municipal Assistance Corp., which prevented the city from going bankrupt.

S&P: What is the fund's credit profile?

SERBE: As of Sept. 30, 79.45% of the fund's assets were invested in AAA-rated securities; 15.58% in AA, and the remaining 4.97% in A.

S&P: What are some of the advantages of investing in taxable municipals?

SERBE: The advantages depend on your tax-bracket, and on the spread relationship between the taxable municipal bonds and tax-free municipals. Let's say you're in the maximum federal, state and local tax bracket which, here in New York City, amounts to about 45%-50%. If you can buy a Treasury at 5%, a taxable muni at 6%, and a tax-free muni at 5% (all with similar maturities), the best buy for you would actually be the tax-free municipal. However, if this investment was for a retirement account, the taxable municipal bond would probably be more appropriate.