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Municipal Bond Forum
FMSbonds, Inc.'s Bond Forum™ is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.
To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years; Dr. Jay H. Abrams, chief municipal credit analyst; and other members of the firm as noted.
Postings are listed by date. You may also view postings by topic using the search box below. If you have any questions, please call us at 1-800-FMS-BOND (367-2663) or e-mail us.
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Inflation expectations
6/10/2009In a prior response to a question about inflation, you wrote: “We are not expecting a significant rise in inflation over the next two years. The economic environment we are experiencing today reflects an unprecedented period of global deleveraging which, in our opinion, and in the opinion of Federal Reserve Chairman Ben Bernanke, makes deflation a greater threat than inflation.” I'm still a novice at bond investing. I infer from your response that the huge looming increase in money supply will be largely absorbed by banks and other institutions as they increase their cash reserves, thereby "deleveraging" their current and future investments. Is this correct?
- D.L., ArizonaWe believe the deflationary impact of the real estate and housing market will keep inflation muted for a significant period of time. Keep in mind, however, that this is conjecture and really irrelevant when contemplating committing funds to the municipal bond market.
More important, is that the most successful tax-free bond investors buy bonds when their funds are available and do not try to time the interest rate markets, since the consequences can be extremely costly. In our 35 years in the bond business, we have never seen anyone who can accurately predict the future direction of interest rates for any meaningful period of time.
The following articles would be helpful for you to review: “Why Waiting Won’t Work,” which outlines the cost of waiting, and “Supercharged Munis,” an interview in Forbes magazine that expressly discusses the issue you are raising.
California G.O. bonds
6/9/2009Considering California’s budget and economic issues, what is your opinion regarding a portfolio consisting primarily of California long-term general obligation Bonds? Hang on to them or sell?
- P.W., CaliforniaAlthough California continues to experience financial difficulties related to current economic conditions, the state possesses a broad and diverse economy that we believe will provide more than sufficient revenues to meet debt service on state-related obligations.
There are strong constitutional protections in place for general obligation bonds, and despite the state's revenue shortfalls, we believe California continues to have the wherewithal to meet its obligations.
Naturally, we cannot predict the future, particularly in these unprecedented financially troubled times. The state, however, would use every resource available to avoid the cataclysmic consequences if California would fail to pay its bonds.
Despite the bad publicity, we would be buyers rather than sellers of California general obligation debt.
How bond ratings are based
5/8/2009Does the rating on an insured bond take into account the risk without the insurance or does it rate the likelihood that both the issuer and the insurer will default?
- P.S.In the past, bond ratings were invariably predicated on the strength of the bond insurer. This made perfect sense since the insurers' ratings were always higher than the underlying rating. Obviously, there was no reason to purchase the insurance if it did not enhance the quality of the bonds.
Currently, some of the bond insurers' ratings have been downgraded below that of the underlying ratings of the bonds. In these instances, the bonds would carry the rating of the underlying credit. If there is no underlying rating, the bond insurer's rating would stand.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.