Municipal Bond Forum

I completely agree with your advice and value your editorials. The only caveat I would add is that I like to purchase what I call a “long-term bond ladder.” I only buy bonds delivering the most interest (generally 20 to 30 years) but with various maturity/call features. This has served me well as I have been averaging 5% returns over the last 18 years and still get “interest rate protection.”

D.M., New Jersey

You are correct on a 10-year ladder and if you don’t need to sell during the period, but I was a bond broker for years and now have 50% of my account in munis. In the early ’80s, I experienced some long bonds going from par to 45 bid. I still ladder and have maturities every year out to 30 years. I remember Sen. Mark Hatfield’s idea to tax munis. Franklin Funds put millions out for the bid to meet redemptions. We had a field day.

W.H., California

I disagree with your points concerning the drawbacks of ladders. You’re not accounting for credit risk, for which you’re not well compensated for going out longer. In a ladder structure, being able to keep buying 10-year bonds is, in effect, a free lunch. The ladder gives you more access to your cash to meet cash-flow needs. Long bonds are callable and are not efficient investments, and they can be called at the worst time for the investor. Going long term only works in combination with a mostly equity portfolio, say, 70 percent or more.

A.S.

I own over 200 individual, mostly insured municipal bonds not subject to the AMT. I’ve acquired these different issues over the past 20 to 30 years. They were not purchased for gain or loss, though I have taken some gains as they present themselves. With the portfolio now decreasing in value, I don’t anticipate any sales. Despite possible inflation and defaults by insurers, I am not overly concerned in that it would seem suicidal for the debtors to default, especially if they ever want to borrow another cent. Your thoughts?

R.H., Ohio

I would like to thank Meredith Whitney for what she did to the bond market. First, she let us have an opportunity to buy high quality muni bond at very good price. Second, she gave a very good warning to politician. If she keeps talking, states and cities will not default. If I were you, I would write a letter to The New York Times titled, “Thank you Ms Whitney, you’re doing us a big favor. Because of you, my bonds will not default.”

L.L., Virginia

Stock brokers and “experts”  speak about the “equity premium,” the rate of return over what would be the rate of a risk-free investment, such as short-term government debt. I see figures of 3 % to 8 % quoted. They also say the best place for long-term money is in equities. What does long-term mean, and who keeps their money in one stock or mutual fund long term? Are taxes considered? Am I wrong or does a portfolio of long-term municipals paying 4% to 6 %  tax free offer less risk and the same return without making the broker rich? Is this a well-kept secret that brokerage houses do not want us to know?

J.S., Pennsylvania

I appreciate your articles on muni bankruptcies. They are very timely for me. My investment advisor (broker) is starting to recommend that I put my muni portfolio under the management of a firm specializing in the bond market. What is your advice?

B.T.

I have a lot of munis that are not associated with a municipality, such as hospitals, airports and utilities. Do these bonds have the same low default rate as “real ” munis, or are they really corporate bonds in sheep’s clothing?

C.M., Florida

I certainly hope you’re on target on how bad of an idea it would be to allow states to declare bankruptcy. I have a considerable amount of my retirement savings in Colorado munis and I love the tax-free returns, but I’m troubled by the focus on defaults. I have called my advisor and contacted Andrew Blum at FMSbonds in Denver — whom I have complete confidence in — and he puts my fears to rest by assuring me that my bonds are insured. But now I am hearing that the insuring agencies have no legs either. It’s scary and I am torn between selling out and going into a 1% CD or hanging in there. The main reason I am going to hold tight is that Colorado, where all my bonds are, seems to be in fairly good shape compared with other states.

W.G., Colorado

Thank you for providing such a well-stated response to the New York Times article last month on alleged work being done to figure out a way for states to declare bankruptcy. As you stated so beautifully, the sensationalism and inaccuracies regarding the nature of the municipal bond market were misrepresented by those seeking to misquote Sen. John Cornyn and the committee hearings he tried to conduct. As a 40-year investor in munis, I take great pride in knowing that my investment dollars are serving a community-minded, positive purpose. It is a wonderful feeling to know that one’s community consciousness can be used for mutual benefit and profit. Thank you for using your prominent position in the municipal bond market field to articulate our mutual concerns so well.

A.A., New York