Municipal Bond Forum

In your commentary, “Interest Rate Reality,” you repeat the mantra, “look first for appropriate quality, then focus on yield.” You also advocate buying long-term individual muni bonds and holding them to maturity— great advice, if the bonds are not callable. The reality is that most, if not all, of the available bonds are callable, some within a year or two. Do you have any general guidelines on how to gauge whether a callable bond is or is not likely to be called?

M.M., Tennessee

Why do high-yield, tax-exempt muni bond funds act more like stock (equity) funds than bond funds? I thought bonds were supposed to move in a somewhat opposite fashion relative to stocks over time. My correlations don’t show this negative relationship.

J.B.

Your recent article (“Municipal Bonds as Trade War Safe Haven?”), left out one very important fact – the lack of supply of creditworthy munis, at par, that have a respectable yield. I’ve seen bonds that a year ago were selling at a deep discount that are now selling at premiums reducing the yields. You’re putting a positive spin on munis despite the lack of availability, low yields, premium pricing and chasing yields maturing when we welcome the new century.

L.S., Texas

I’m currently with (a large stock brokerage firm) where I hold over $300,000 in California municipal bonds. Income comes to $12,000 – $13,000 a year. It is one of the better plays in my portfolio. I asked my advisor there if perhaps I should increase my munis, but he was adamant that rising rates will work against them. Looking at other fixed-income choices certainly has not excited me. If I invest another $250,000 in diversified munis with a duration of about seven years, what would be your choices through FMSbonds?

H.C., California

You have often written about the dearth of munis available for individual investors to purchase.  Won’t new bank rules regarding high quality liquid assets (“Reversal on Bank Rules a Win For Muni Bonds”) make things even worse?  Why would you applaud a big new investor that can purchase much more and make things even more scarce?

R.K., Texas

I agree with your article, “Reviving Advance Refunding Bonds.” Why aren’t issuers and bond attorneys fighting back?

The government’s position is that having additional tax-exempt debt outstanding in parallel with unrefunded debt diminishes federal income tax receipts. Perhaps so, but similarly, interest on U.S. Treasuries is exempt from state and local income taxation. This means that as the feds expand debt issuance, states suffer in exactly the same manner as that about which the feds are whining. Fair is fair and what’s good for the goose is good for the gander. Fight back! The Government Finance Officers Association and individual states should sue.

The reality for investors is that in the absence of refunded bonds, most tax-exempt bond buyers would likely choose to just invest more money in high-grade munis and not in taxable-interest securities, so the government is chasing a ghost.

What dope came up with this idea, anyway?

M.C., Maryland

I know you are a proponent of buying long-term municipal bonds. In light of the current yield curve and muni-to-Treasury ratios, what credit rating, maturity, call date and coupon rate would you recommend?

L.C., California

I read your articles and find them very interesting, but here’s a question I don’t see addressed: Why do high-yield tax-exempt municipal bond funds act more like stock (equity) funds than bond funds? I thought bonds were supposed to move in a somewhat opposite fashion relative to stocks over time. My correlations don’t show this negative relationship.

J.B.

I just read your timely article, “What’s In Store For Municipal Bonds This Year” and noticed you mentioned that munis are currently a bargain. Over the last several years the AAA-muni to 10-year-Treasury ratio has ranged from the low 80s to over 100. It is currently in the low 80s. Wouldn’t that make munis, at least vs. Treasuries, expensive at this time?

L.C., California

I was glad to see your Bond Forum answer entitled, “Insured Puerto Rico Muni Bonds in Demand,” which confirmed my belief that these were worth holding. My question is, if the interest on a Puerto Rico bond is being paid by, say, Assured Guaranty Municipal but the bond is callable, is there any way on earth that bond can be called? I would think not, which would in essence also bring “call protection” to these bonds.

M.M., Tennessee