Municipal Bond Forum
Looking for yield
Q
I have a large portfolio of California municipal bonds with an average yield of about 5.20% and eight to nine years in duration. In the current interest rate environment, what maturity dates and quality would you recommend for additional purchases? I would like to obtain yields of close to 5.00%, but I’m concerned about buying long maturity issues if interest rates rise. Also, you talk about “longer-term” bonds. Are you referring to 30-year bonds only or 20 to 30, etc.?
A
James A. Klotz responds:
Having visited our Web site, you may be aware we are proponents of buying high quality, longer-term bonds, which enables you to maximize tax-free income in your bond portfolio.
This additional income can often exceed the annual income of short-term bonds by more than 60% and enables you to reinvest at higher rates if they do become available.
This philosophy has successfully served municipal bond investors over the years. They recognize that neither they nor market “gurus” have the ability to accurately predict the direction of interest rates for any length of time. In fact, most “experts” have been calling for higher interest rates for years.
Keep in mind that you are buying tax-free bonds for the income. Sometimes over the life of these bonds they will be worth more than you paid for them, and sometimes less. Neither condition should prompt a sale. Bonds are purchased for income, not capital gains.
Today, for a California resident, the return on 5.00% in-state bonds can be comparable to earning 10% on taxable bonds for investors in higher tax brackets.
Regardless of any fluctuations in market value, the dependable stream of tax-free income provided by high quality municipal bonds can be counted on year after year. That’s why you are buying bonds in the first place.
As to what we consider to be “longer-term” bonds, it depends on the yield curve at the time of the investment. Whenever we can capture 75% or more of the 30-year rate with a 20-year bond, we would opt for the shorter maturity.
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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.