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Don’t let short-sighted decisions obscure the bigger picture
Q
Regarding your article on Detroit (“Investors in Michigan Munis Strike Back“), I think Michigan’s governor needs to understand the impact of his short-sighted decisions. Every day it seems to get worse in the muni market. I keep reading that a rally will occur soon. What is your opinion?
A
James A. Klotz responds:
Despite somewhat higher rates in the Treasury bond market, high quality munis today provide historically high after-tax returns in comparison to other fixed-income investments.
In our 40 years of experience, we have learned that trying to time the market has always proven to be a futile exercise for income investors. The cost of waiting is too prohibitive.
The tax-free bond market will return to its traditional relationship with corporate and Treasury bonds when investors recognize that the Detroit bankruptcy is a one-off event, and muni-bond fund redemptions ebb. This can occur unexpectedly and overnight, as it did following the Meredith Whitney hysteria.
In the meantime, we believe investors buying top quality tax-exempt bonds yielding 5% or more will be very pleased they did.
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