Warren Buffett shocked municipal bond investors early this year when he was quoted in Berkshire Hathaway’s annual report as saying that, under dire circumstances, municipalities who have issued insured debt might be tempted to default on their bond payments rather than raise taxes.
We were deluged with e-mails from muni investors, suddenly concerned about the credit quality of their bonds.
As we said then, and as it turned out, Mr. Buffett’s comments related more to his hesitancy to insure bonds than to invest in them.
Buffett doubles tax-free bond holdings
A recent filing from Berkshire disclosed that in the past nine months, Buffett’s company doubled its tax-free bond holdings. Its muni portfolio rose to $4.05 billion by the end of March 2009, from $2.05 billion on June 30, 2008.
It is clear that since the markets imploded in the fall of 2008, Berkshire has been loading up on munis at what Mr. Buffett termed “unthinkable yields.”
Our clients and visitors to our Web site remember that we recommended taking advantage of the forced selling by hedge funds and other financial institutions to purchase high quality tax-free bonds, with yields at historic highs when compared to other fixed income investments.
Bond buying hits record
Statistics show it was not only Mr. Buffett who recognized this unique opportunity. Investors have been snapping up individual bonds and are flocking to municipal bond funds in record numbers.
According to The Bond Buyer, muni funds have experienced inflows every week this year, and recently this record pace has accelerated.
Investors have poured over $1 billion into muni funds for five straight weeks. Amazingly, prior to this year, weekly inflows exceeded $1 billion only 10 times since the inception of these funds.
This doesn’t come as a surprise to us considering the myriad of compelling reasons to buy tax-free bonds we cited over the past nine months, and they still apply.
For more on our perspective, see “Tale of Two Investors”, which outlined the events creating these extraordinary opportunities; “What Mark to Market Means to You”, on how distortions in the muni market created opportunities for investors; and “Who Needs a Bond Manager?” where we outlined how to enhance the unusual value in the bond market. Other recent articles alerted investors to the government’s new municipal subsidy program and how it would lend support to the muni market (“BABs Bolster Muni Bonds”) and our illustration of why “Why Waiting Won’t Work”, even if muni yields moved higher. These thoughts have become even more significant as yields have declined since then.
Despite the recent rally, investment grade municipal bonds can be purchased to yield more than 5.50%, which is equivalent to approximately 8.5% on a taxable investment for an investor in the highest tax bracket (35%) and over 9.00% if the administration’s proposed bracket of 39.6% is enacted.