Municipal Bond Forum
Viewing an investment in context
Q
I like your articles, but stocking up on long-term bonds and paying par plus a premium to get maybe 5% yield with investment grade ratings is setting yourself up for a big loss of principal when interest rates increase, and they certainly will at some point over the next 20 years. You also assume that the issuer will remain solvent over the entire 20 years. I’m a fixed-income guy, but it’s tough these days to rationalize all these variables and go out 20 years or more.
A
James A. Klotz responds:
It’s a funny thing: To us, “these days” don’t seem to be significantly different from the old days. Although you have valid considerations, they would have been equally reasonable 10 and 20 years ago.
As you know, an investment contains elements of risk, so it can’t be analyzed in a vacuum. It must be evaluated within the context of possible alternatives.
In our article, “Avoiding Interest Rate Roulette,” we attempted to illustrate that for income investors, the yield on CDs and short-term bonds are not attractive options, while 5.00% tax-free yields that can be equivalent to 8.50% or more on taxable investments are extremely compelling.
Over the life of your bonds, they will sometimes be worth more than you paid for them and sometimes less, but on investment-grade munis, your tax-free interest clock keeps ticking.
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.