Municipal Bond Forum
Long-term bonds offer flexibility
Q
You are correct on a 10-year ladder and if you don’t need to sell during the period, but I was a bond broker for years and now have 50% of my account in munis. In the early ’80s, I experienced some long bonds going from par to 45 bid. I still ladder and have maturities every year out to 30 years. I remember Sen. Mark Hatfield’s idea to tax munis. Franklin Funds put millions out for the bid to meet redemptions. We had a field day.
A
James A. Klotz responds:
We remember the early ’80s very well. When we opened our doors at FMS in 1979, we were selling AAA insured 5 ¾’s at 100.00. By early 1982, we were selling AAA 15% bonds. This was not a great period to be carrying inventory.
Even then, however, investors like you who owned long-term bonds were able to sell their 5 ½ % bonds, replace them with similar bonds and accumulate substantial tax-losses, which were used to eliminate capital gains taxes on assets that appreciated during this period. If an investor had no capital gains to offset, these paper losses were carried forward year after year to reduce the investor’s adjusted gross income.
In very short order, as you know, interest rates declined precipitously and the bonds purchased at enormous discounts, in the “swap,” traded at 100.00 or more.
The mathematical benefit of these tax swaps is hard to quantify but the investor certainly enhanced the yield on his bond portfolio through tax savings.
This is still another reason to opt for the flexibility of long-term bonds.
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