Municipal Bond Forum
Will my bonds be called?
Q
I am new to your site and enjoy it. I have started investing in long-term munis with the idea of buy and hold. Since many of your articles/strategies seem to echo that philosophy, I couldn’t be happier. All of my bonds are, of course, callable, so my question is: What is the probability that the municipalities will call my bonds prior to maturity? Over the past, say, 30 years, what proportion of callable bonds have been called? What signals will alert me, say a year or 18 months in advance, whether my bonds are likely to be called?
A
James A. Klotz responds:
Statistics regarding bond call frequency over the past 30 years will not really be useful in attempting to predict future calls because of the importance of the existing interest rate environment in the issuers decision making process.
The two questions that must be asked are:
1. Does the structure of the bond issue allow for accumulation of funds to facilitate calling bonds (sinking funds)?
2. Can the issuer borrow at a lower interest rate than the rate carried by the outstanding bonds?
There are often “partial calls” on bond issues. In these cases, we can track prior call action and make assumptions regarding the probability of future calls. If the interest rate environment is favorable, issuers can also pre-refund (refinance) existing debt by issuing new bonds to retire the old issue on its call date.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.