Municipal Bond Forum
Inflation expectations
Q
In a prior response to a question about inflation, you wrote: “We are not expecting a significant rise in inflation over the next two years. The economic environment we are experiencing today reflects an unprecedented period of global deleveraging which, in our opinion, and in the opinion of Federal Reserve Chairman Ben Bernanke, makes deflation a greater threat than inflation.” I’m still a novice at bond investing. I infer from your response that the huge looming increase in money supply will be largely absorbed by banks and other institutions as they increase their cash reserves, thereby “deleveraging” their current and future investments. Is this correct?
A
James A. Klotz responds:
We believe the deflationary impact of the real estate and housing market will keep inflation muted for a significant period of time. Keep in mind, however, that this is conjecture and really irrelevant when contemplating committing funds to the municipal bond market.
More important, is that the most successful tax-free bond investors buy bonds when their funds are available and do not try to time the interest rate markets, since the consequences can be extremely costly. In our 35 years in the bond business, we have never seen anyone who can accurately predict the future direction of interest rates for any meaningful period of time.
The following articles would be helpful for you to review: “Why Waiting Won’t Work,” which outlines the cost of waiting, and “Supercharged Munis,” an interview in Forbes magazine that expressly discusses the issue you are raising.
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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.