Municipal Bond Forum
On Suze’s take
Q
Suze Orman (“Suze Orman, James Tisch on Common Ground“) didn’t address the concern that if interest rates go up, a purchaser may regret not waiting to get the higher rate. It may be that it’s still better than the 1% taxable at an FDIC-insured institution, and that a bond purchaser can always hold back some funds and ladder. And, of course, there is no perfectly safe, highest rate guaranteed investment. Bonds are a good part of a balanced portfolio, but Suze’s assessment is very limited.
A
James A. Klotz responds:
We agree with Ms. Orman’s approach to the municipal bond market.
More than 40 years in this market has taught us that attempting to predict the direction of interest rates is a futile exercise, even for the most renowned economists. In fact, most of these “seers” have been warning of rising interest rates for more than a decade.
The “cost of waiting” in a CD or sacrificing 40%-50% of available, reinvestable, tax-free income by laddering can be extremely prohibitive. In our experience, it has been the investors with laddered portfolios who have expressed regrets as they have been forced to reinvest their maturing bonds at lower and lower rates. Waiting in a money market, for any period of time can make it almost impossible to recover the income forfeited by not buying the longer-term bonds.
There is no question interest rate fluctuations will impact the market value of your bonds, which is why we continually state that over the life of your longer-term bonds, they will sometimes be worth more than you paid for them and sometimes less. Neither occurrence should trigger a sale.
The bond portion of your investment portfolio is designed to provide income, not capital gains. Maximizing your tax-free income on every purchase produces more reinvestable income that can enhance your portfolio’s yield when rates are rising.
Today, due to the mass liquidation of muni-bond fund shares, higher yields have resulted in improved valuations and greater protection against further price declines if Treasury rates do rise. Munis typically trade at a ratio to Treasuries of approximately 90%. Today this ratio is more than 110%.
Perhaps this is what captured the attention of Ms. Orman and Mr. Tisch.
Start here.
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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.