They’re back.
In January of this year, a consensus of economists and financial pundits were issuing dire warnings of the imminent, inflation-induced, interest-rate explosion, which they deemed unavoidable due to the Fed’s easy money policy and the Obama administration’s fiscal stimulus.
The 10- and 30-year Treasury bonds were then yielding 3.66% and 4.62%, respectively.
At that time, we commented that the greater the unanimity of opinion, the less likely it is to be on the money, “Beware of Conventional Wisdom”.
Our concern was that income investors might become swayed by the so-called “experts” and abandon their practice of buying bonds when investment dollars were available and retreat to the money market until the promised rise in rates occurred. This was at a time when money market funds were paying next to nothing and the “cost of waiting” was never more prohibitive.
Fast forward six months to today; not only have rates not risen, they have dropped significantly. We continue to be in an extraordinarily low interest rate environment, and according to the Fed, this is likely to continue for some time.
Now, without even pausing to catch their breath or apologize to investors who paid the price for following this misguided advice, these same self-anointed investment experts have built a new fear bandwagon. The sensational headlines scream that muni bonds will default en masse as America goes the way of Greece.
Fear the fear mongers
Before taking this to heart, it is only fair to point out that none of these “gurus” warned of the Wall Street meltdown, the housing market collapse or suggested buying high quality munis 18 months ago when they were yielding 7.00%.
Before following this ever-abundant advice from financial writers looking for the sensational topic of the month, it would serve investors well to research previous communications from these sources to determine if there is a basis for assigning any credibility to their most recent opinions.
We also invite you to visit our site, where we have archived our past commentaries dating back to January 2001, when the site was established. They are sortable by author, topic or date.
Avoid Armageddon investing
Obviously, these are difficult times for municipal entities, but Armageddon is not looming, and we advise against approaching your investments as if it were.
In a recently released report, Moody’s indicated that despite the economic downturn, it expects most local government bond ratings to remain stable. The report reviews the various strategies employed by local governments to cope with the stresses engendered by reduced property tax revenues.
Standard & Poor’s offered its opinion on this subject this month saying, “the U.S. housing market appears to be recovering from its record-breaking slump. Housing starts and sales are up sharply from last April’s lows, and home prices showed their first year-on-year gain in three years in February.” S&P expects that home sales will continue to rise.
Regardless, there is no question that municipal issuers are facing heightened challenges. In the past year, there have been approximately 200 defaults in the muni market. To keep this in perspective, however, it must be noted that the majority of these bonds were riskier from the outset and secured by unimproved land, hotels, casinos and small hospitals. And the defaults represent only .002% of a $2.8 trillion market.
Unwilling to do their homework, the media would have investors throw the baby out with the bathwater.
Talk with a specialist
That is where we can help. When selecting or reviewing your bonds, it has never been more important to talk with a municipal bond specialist.
Unlike most brokerage firms, at FMSbonds, we also own the bonds we sell. Toward this end, we employ a full-time municipal credit analyst, whose opinions are shared with our trading desk, and brokers who are trained exclusively in municipal securities.
Remember, bonds are loans. Ask your FMSbonds representative, “How do I get my money back and how am I secured?”
In this lower interest rate climate, we encourage our investors to avoid sacrificing quality to reach for higher yields. With today’s lofty tax brackets and the promise of higher taxes in the future, good quality, tax-free bonds yielding 4.50% to 5.00% will prove to be a valuable asset as the country continues on what we see as a long, slow recovery.