Municipal Bond Forum

I have been investing with FMSbonds since January of this year and am wondering how rating agencies (Moodys, S&P etc.) are held accountable for the ratings that are placed on the bonds. Can they be held legally responsible if they rate a bond “AA” and it defaults, or are they immune from legal prosecution for their services?

C.M., New Jersey

I was told at Chase bank that I could get 4 ½% to 5 ½% tax-free interest on a California muni bond, insured by the SIPC, with an investment of $70,000? Is that true? Is that a safe investment? How do they get their commission on that?

C., California

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?

D.L., Arizona

Does the rating on an insured bond take into account the risk without the insurance or does it rate the likelihood that both the issuer and the insurer will default?

P.S.

I’m not sure you are conveying accurate information. As wealth advisors and buyers of muni bonds, we think munis have become incredibly overbought. It’s now difficult to get 3% inside of 2016/2017. A big reason behind the recent muni rally is the issuance of “Build America Bonds.” Buyers of munis that were risk adverse have come out of the woodwork to snap these up, resulting in a rise in muni bonds. The elevated prices may just be a knee-jerk reaction to the new bonds. There is also speculation that this type of issuance will catch hold. If it does, we may see many municipalities call current bonds to reissue debt with this backing. It is too early to tell, but hopefully this is not the “new normal” level of muni bonds. On the flip side, we believe this is not a good time to buy, but rather sell munis.

T.W., Colorado

I own 4 million in short-term treasuries that are not paying any interest to speak of. Is this a good time to buy California munis or should I wait until interest rates rise?

C.C., California

Your article, Why Waiting Won’t Work, was great. It was certainly timely because I’m in the process of choosing munis. The Internet has been a poor location to find information on how to estimate potential profit if I sell a bond before maturity in, say, one or two years. I would need to estimate the price of the bond when I sell it. How would I do that? I’d like to figure out what my risk exposure is (in addition to bond rating, for example). In your article you say buy now, but how do I know that is the best strategy for the short term?

C.N., New Hampshire

Between 1980 and 1982, yields on fixed municipal bonds fluctuated between 8.5% and 14%, CPI declined from 14% in Feb. 1980 to 7.6% in Feb. 1982. Does history predict the future?  How high do you anticipate inflation to rise over the next year or two? Do you anticipate it to stay elevated for an extended period?  Do you expect there to be a direct correlation (as in the 1980s) to the muni yield?

S.L.D, Colorado

I own a D.C. tobacco bonds in my account at FMS. Despite your optimistic view, I have noted its continual decline in value this year to a current 63.624. Why is that?

M.T., Florida

I came across a historical chart of 20-year municipal bond yields that spanned the mid 1960s through today. I noticed that municipal bond rates rose dramatically in the 1970s and 1980s. As a matter of fact, muni yields rose above 10% in the 1980s. What caused the rise?

R.S., New York