Municipal Bond Forum
Muni Floaters
Q
Are there any advantages to buying floater muni bonds? What is the best way to analyze floaters?
A
James A. Klotz responds:
Floaters are a short-term, tax-free investment that pays higher rates than money markets. However, unlike money-market funds, the holder can only liquidate shares on certain predetermined dates.
Although higher rates make floaters appear attractive, particularly in today’s inverted yield curve environment, investors need to consider the potential pitfalls: Lack of mobility and income risk.
When short-term rates begin to decline, the floaters will provide long-term investors with no income protection and floater rates will drop dramatically. History teaches that by the time the investor attempts to return to long-term bonds, rates will have also dropped significantly, leaving the investor unable to maintain the desired level of income.
If you are simply seeking a short-term parking place for transactional, rather than longer-term investment dollars, floaters can be ideal.
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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.