Billions of dollars of municipal bonds will be redeemed or called this summer. What should investors do?
One advisor thinks they should take the cash… and sit on it.
A contributor to Forbes notes the ravenous appetite for munis, a phenomenon another financial site calls a “food fight.” Investors plowed almost as much money into muni bond funds through mid-May – $41.7 billion – as they did in all of 2020. In fact, inflows this year are on pace to reach one of the highest on record.
Issuance, on the other hand, is roughly the same. Through last month, state and local governments issued about $188 billion of municipal bonds vs. $152 billion during the same time last year.
Analysts don’t expect an immediate, big change in the supply of munis. With federal aid and an upswing in state and local revenues, they say, there’s little pressure on governments to borrow.
Amid this environment, the Forbes contributor says investors whose municipal bonds will be redeemed or called this summer should avoid the market for now. The advisor preaches patience and easing back into the market in the fall when, the advisor says, issuance is expected to increase.
We say that’s an unnecessary and costly gamble.
Another case of ‘waiting’
Pundits have advocated the wait-and-see approach for decades. Boiled down, it amounts to sitting on your hands and betting that yields will change. Without the benefit of a crystal ball, investors are left to speculate on when that will occur, by how much yields will change and the precise date when they should start buying again. Just hold off, this sage advises, until sometime later.
And that’s the rub.
Investors who heed this guidance usually park their cash in money-market funds that yield almost nothing. At the same time, they’re depriving themselves of a steady stream of tax-free income, i.e. they’re derailing their own objective. Worst of all, when they do decide to jump back into the market – whenever that is – they’ll never recoup the cash they missed out on while they waited.
There are plenty of reasons why investors are piling into municipal bonds (e.g. “Muni Market Comes Full Circle,” “State and Local Finances Closer to a Boost”). We don’t see those abating. Nor do we find that idle cash and rolling the dice on some future market movements is a sound municipal investment strategy.
If your municipal bonds will be redeemed or called, we think that instead of laboring to outguess the market, you should keep your money working for you without missing a day’s interest.