Municipal Bond Forum

My wife and I have followed your advice about seeking high income in quality long-term bonds held to maturity and are happy with the results. Now, at age 67, we are still adding to our holdings and would like to have your thoughts on the factors that might go into a choice of maturity length. A 30-year-bond may well outlive us, for example, but provides a better yield than a 20-year bond and should be the better choice if, as we hope, we never have to sell it. Is this still the case if an unforeseen event should require us to sell in 20 years? Should we be buying some bonds with shorter maturities (10 to 20 years) or is longer term still the best choice?

R.K., Minnesota

There was a report on the CNN Web site about the city of Harrisburg, PA, missing a bond payment, apparently for the month of August. The governor of Pennsylvania has refused to bail out the city. Could you please comment on this situation and whether you think it may be a harbinger of things to come?

P.G.

You have always advocated purchasing “high-quality, long-term bonds” for income-interested investors. Yet, a few years ago, insured bonds were rated AAA (not their underlying rating) and were touted and sold as high quality. We know what happened to the insurers and the bonds that were considered “high quality.” Again, today, some bonds are being presented as AAA merely because they are “insured.” These insurers could not cover defaults if they should occur, so why should the bonds carry that rating?

A.G., Florida

I bought long-term muni bonds last year with 5% to 6% coupons at below par value. They have returned regular income and appreciated in value. In six months, I receive a multimillion-dollar lump sum and want to purchase munis for income. If current prices don’t change, then I would be buying bonds at a premium and building in a long-term loss. Should I buy anyway for the income or look for high-quality bonds that are nearer their par value?

B.P., Oregon

I’m a 58-year-old muni banker and love your stuff. One question: I thought long laddering in munis made pretty good sense if I am trying to build my own annuity for retirement, yes?

R.L., New York

My wife currently owns about $3.2 million in fairly well rated California munis. Fortunately, we bought them in late 2008, when the hedge funds were dumping good quality for liquidity, so our overall yield is about 4.8%. The bonds are well laddered from 2016 thru 2032, and we have an additional $2 million on the sidelines. As a muni-bond salesman, you must make things look better than they are. By citing the “past 30 years” in your article, you ignore the fact that we are in unchartered waters and cannot rely on the past. With the unbelievable debt being piled up by the Marxist Obama Administration and the continued printing of “funny money,” it’s only a matter of time before inflation hits big time and all bonds will be crushed. Your articles should address the real world as it is today and the dangers people face holding munis. Here in California, the municipalities, including Los Angeles and the state itself, present huge additional risks for muni holders. The unions are pushing a bill through the Legislature that will make it very difficult for municipalities to declare bankruptcy. It’s a mess out here. Any school child can calculate that a short-term bond pays less interest than a long-term bond. The point is that you are hedging against runaway interest rates and, by doing so, accepting a lower return. If you want people to believe what you write, you must step back from being a salesman and face the questions that people are asking today about munis.

B.W., California

I’ve been a bond buyer for almost 15 years and totally agree with your views on laddering. I never thought it was a great idea, and I always buy high quality long-term bonds and hold them to maturity. I’ve made a lot of money with that strategy over the 15 years.  I reinvest the interest as I get it and it has worked out like a money machine. Thanks for this article. I always read the FMSbonds articles with great interest. Lots of good information in them.

M.M., Missouri