Municipal Bond Forum
Sitting on cash while the meter runs
Q
I’m a long-term individual bond investor with a goal of getting a minimum of 5%. California bonds are selling at a very high premium right now. I’m sitting on some cash and wondering what next year might bring in terms of rates and prices.
A
James A. Klotz responds:
In the 40 years we’ve been involved in the fixed-income markets, we have yet to see anyone accurately predict the direction of interest rates for any period of time. In fact, the majority of economists and so-called experts have been forecasting higher interest rates every year for the last decade.
The most successful tax-free bond investors commit investable dollars to the market when available, rather than parking these funds in money-market instruments or CDs in an attempt to time the market.
The longer your money is left in these types of accounts, the more money you’ll forgo waiting for interest rates to rise – a phenomenon we refer to as the cost of waiting. If rates do move up, you will need to earn more than 5.00% to achieve your 5.00% goal, and if they don’t, you will never catch up.
Bond yields cannot be evaluated in a vacuum; they must be compared with other income options.
In today’s market, no taxable fixed-income bonds (corporates, Treasuries, or agency securities) provide the after-tax return of high quality California bonds.
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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.