FMSbonds, Inc.’s Municipal Bond Forum is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.
To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years, and other members of the firm as noted.
Postings are listed by date. If you have any questions, please call us at 1-800-367-2663 or e-mail us.
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.
J.G., Florida
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.
V.L., Florida
In your article, “Clouds Darkening for Tobacco Bonds,” you don’t mention the status of tobacco bonds that are insured. I have California tobacco bonds insured by BHAC. Should I be concerned?
R.G., Texas
I imagine Chicago’s plan to increase cigarette taxes, which you discussed in your article, “Clouds Darkening for Tobacco Bonds,” will cause problems for Illinois tobacco bonds. I purchased Erie, New York, tobacco bonds, rated BBB/BBB+, first tranche taxable. The maturity date is 2028 but they pay faster as all principal reductions for the bond issue go to the first tranche. Are you concerned about these types of bonds?
S.Y., Maryland
Everybody is dumping Puerto Rico bonds because 13.5% unemployment is so high. Thus, people are moving out of Puerto Rico and it is declining in population. Don’t you think this could be dangerous for investors?
L.B., California
I need a means of measuring the likelihood of problems with Puerto Rico bonds. A power and light company generally sounds OK as long as consumers can pay their bills. But would hard times in Puerto Rico be that much different than hard times here in the states?
R.S., New Jersey
In your article, “Herd Mentality Yields Unique Value,” you seemed to place more value on the insurance aspect of a bond rather than focusing on the underlying value of the issuer itself. AMBAC, FGIC and SCA all went bankrupt. Does insurance really guarantee anything?
J.S., Pennsylvania
We nearly had a default of U.S. obligations because of the choices made by representatives of several states. Given their willingness to allow a U.S. default, is there a default risk premium built into state and local bonds?
I.P.
I wonder, how does your firm select the bonds on your offering list? It does not seem to be very large or comprehensive. Do you offer these bonds based on their qualities?
Y.D., California
I’m 83 years old and have never invested in bonds. In the past, I’ve been in stocks and mutual funds, but in 2009 I sold everything and invested in CDs. With the level that CD rates have dropped to, I’ve been thinking of bonds. My principal concern is loss of capital as a result of rate increases. My secondary concern is length of term. Can you give me any advice?
J.T., New Jersey
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