Municipal Bond Forum
Are high yields and early call dates linked?
Q
I have been investing in municipal bonds for the last three to four years simply because they provided a reasonable rate of return relative to risk. I have noticed that the high yields and early call dates are related. What I mean is, when the rates (yields) are at historic highs, the issuer usually puts in a call date at five to 10 years on a 30-year bond. So there is no point in waiting to time the market (assuming you can do it) because you can’t really lock in the rate for 30 years. If rates do fall five to 10 years from the issue date, the issuer can call. I observed this on the following basis. If rates now (about 4.5%) are low compared to historic highs (10 to 12%), then I do not see any bonds available today with a coupon of 10 to 12% at a high price to compensate for today’s relative lower rate. Given this, there is no reason to wait to lock in a rate even if there is a fairly general consensus that rates will go up in the next year. In your long experience, have you seen bonds issued at high rates (10%) comparable to long-term S&P average rates without call features? Did anyone get lucky?
A
James A. Klotz responds:
Although your observations may be correct, we think your conclusion may not be. Most new bonds are still being issued with 10-year call dates. The higher coupon bonds you refer to were issued when interest rates were higher and had a 10-year call feature at that time (ex. callable 5/1/09 at 102.00). Today the bond is callable in four years because of the time that has elapsed since its issuance.
The state of California still has some non-callable outstanding debt carrying interest rates of 10%. Most of these issues are nearing their final maturity dates.
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