Municipal Bond Forum

If dollars from the sale of bonds with looming call dates are used to purchase cheaper, longer- term bonds, would this lengthen the average maturity or call dates in my portfolio? If so, would this cause an increase in risk due to rising interest rates that seem predictable over the next few years? For example, if I replace many of my shorter-term bonds with longer-term ones and interest rates rise, I might be sacrificing the opportunity to buy bonds later at higher rates. As you can probably tell, my muni bonds are currently arrayed in a “ladder.”

D.T.

I read your article, “Don’t Try this at Home,” and was wondering whether I should sell bonds that have appreciated and use the profits to buy other bonds, or just hold the bonds I own.

G.S., New Jersey

In your article, “The Upside of Lower Rates,” on issuers who refinance or pre-refund their bonds, I do not understand the math in the example explaining the yield drop after the bonds are escrowed in Treasuries. I understand the yield would be lower because of the additional $7,000.00 invested, but I cannot arrive at a figure of 2%.

E.L., Washington

I think we were able to understand the process you describe in the article, “The Upside of Lower Rates.” However, we had some difficulty with the concept of replacing the bonds with higher- yielding bonds that are not sub par. Does it make sense to sell the portfolio while the bonds are at a higher value? Can the sale of pre-refunded bonds be replaced with safe bond investments?

V.A., Nevada

What was is the default rate in the last year for non-rated munis? There are many bonds that are not rated by Moody’s, and I’m asking about those issues.

G.K., Illinois

I’m a client and read your article, “Moodys: Muni Default Rate to Remain Low.” You said that only one general obligation issuer, out of the 9,700 rated by Moody’s, defaulted. I thought GOs couldn’t default? Also, I thought states, like California, can’t file for bankruptcy and default on their GO bonds. Correct?

D.W., California

I´m new in the municipal bond market. Can you tell me where to go to find the credit rating for states and cities. I have been in the stock market for 35-plus years. I’m now retired and looking for something a little more stable.

P.D., Michigan

I’ve been a long-time client and have been following FMS’ advice on taking tax-free income and holding my bonds to the end for return of capital. I am now 80 ½ years old. I read your article, “Bad Medicine for an Imaginary Illness,” and cannot see how it applies to my specific situation. As a client who is over 80, what do you recommend I do with my long-term holdings?

W.H., Florida

I read your story, “Don’t Try this at Home,” about the ill-conceived report that recommended investors engage in “selective selling” of their munis. I had this exact situation about eight years ago with an aggressive bond trader. He was looking to make some more money and suggested I sell. I said to him, “You want me to sell all my bonds because you think I should increase their quality level and cut my income nearly in half?” He said “Yeah.” I promptly moved my money elsewhere and kept all the bonds.

M.J.

Do you believe Ambac will satisfy its obligations related to the Las Vegas Monorail issue? If not, why would any insurance company ever pay another claim? It appears that underwriting policies and collecting premiums without paying claims is a pretty lucrative business model.

M.P.