Municipal Bond Forum
On In the Belly of the Curve:
Q
It seems that your strategy of buying 20- to 29-year maturity munis, and swapping them out for shorter term ones with the same yield, will result in a loss of principal in the 20- to 29-year bonds. I have been using a strategy of purchasing only one- to two-year short-term bonds. I have not lost principle, and I have maintained advantageous yields compared to similar corporate bonds. Since I am in the maximum tax bracket, munis are providing a better return than corporate bonds. There are other reasons for wanting to preserve principal rather than play the interest rate guessing game. I don’t like to gamble and I don’t have a lot of time left on this planet.
A
James A. Klotz responds:
The article recommends that investors who normally purchase bonds maturing in 30-plus years investigate the returns available on bonds maturing in 13 to 22 years. Investors can shorten their maturities while still capturing 95% of the yield available on much longer-term bonds.
The swap recommended, in a rising rate environment sometime in the future, would involve selling the intermediate-term bonds in order to purchase longer, higher-yielding securities. The theory is that in this scenario, rates would rise more (and prices would drop more), on 30-plus-year bonds than on the intermediate-term securities being purchased today.
The concern for short-term buyers, such as yourself, is the inability to "lock in" a constant rate of return for any reasonable period of time. Although short-term interest rates are attractive today, should they decline significantly, it will hinder your ability to maintain your investment income.
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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.