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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.
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In an e-mail to me, you recommended a “AA”-rated premium bond maturing in 2043 and callable in 2020, with a yield-to-call of 2.60%. You said it represented “outstanding value.” I don’t agree. We’re in a 3.30% market for that quality of bond, and it’s almost certain to be called on its call date in five years unless interest rates rise dramatically.
- E.O., Alabama
We agree, this is a 3.30% market, and we are sure you’re aware this rate applies to “AA” quality bonds with 30-year maturities, whereas the rate on similar quality five-year bonds would be approximately 1.50%.
If the bonds you were offered were to be called in 2020, it would result in a 2.60% yield, providing 73% more yield and income than a bond due in five years.
If the bonds are not called, the yield to maturity will be 4.22%, which provides 28% more yield and income than the 3.30% par bond to which you refer in your e-mail.
When a bond yields 1.10 basis points more to the call date and 92 basis points more to maturity than can be purchased on comparable quality bonds in the new issue market, we consider that to be a win-win situation and an outstanding value.
We can’t be as certain as you that these bonds will be called in five years. Forty years of experience in this market has taught us to refrain from predicting interest rates. As municipal bond specialists, our efforts are geared to design the most sensible approach to either scenario.
We don’t know many people who, five years ago, thought interest rates would be where they are today.
Please don't deride Meredith Whitney’s powers of prediction (“Know Your Expert”)! I thank her and FMSbonds for the greatest muni bond buying opportunity of my lifetime. I have her picture hanging in my office and eagerly await her next prognostication. My only complaint: The bonds are being called before I am interested in losing them.
- A.B., Florida
We are pleased to hear you were able to take advantage of that situation. We don't think you should expect new predictions from her regarding muni bonds anytime soon.
I had another thought after reading your latest article (“Know Your Expert”): I agree on continuing to buy tax-free bonds regardless of what the so-called gurus say. The only problem is, there are no bonds to buy. A perfect example is the bond offerings on your Web site. There used to be six pages, now there are fewer. What’s the secret of buying quality bonds at fair prices in today's market?
- L.S., Texas
We have been in a very low interest rate environment across the entire fixed-income spectrum for quite some time.
You are correct that the volume in our market has been down, but on an after-tax basis, muni yields are still more attractive than their taxable counterparts.
As far as our offerings, if you don’t see what you’re looking for on our Web site, be sure to call an FMSbonds muni specialist at 1-800-FMS-BOND.
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.