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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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Harrisburg, PA debt payment
9/7/2010There was a report on the CNN Web site about the city of Harrisburg, PA, missing a bond payment, apparently for the month of August. The governor of Pennsylvania has refused to bail out the city. Could you please comment on this situation and whether you think it may be a harbinger of things to come?
- P.G.Although the city of Harrisburg has not missed an interest payment on its general obligation (G.O.) debt, the city is reporting that it will not make its upcoming payment due September 15.
These G.O. bonds are insured by AMBAC, who will be responsible for the payment should a default occur. It is still unclear whether the state of Pennsylvania will assist the city.
Despite the fact that Harrisburg is the state capital, it has a population of only 45,000 and has badly managed its finances.
It is true that the financial crisis has put many municipal budgets under stress, but we believe the majority of issuers will continue to make the necessary budget adjustments to maintain the integrity of their bonded debt.
Examine underlying credit worthiness
8/18/2010You have always advocated purchasing "high-quality, long-term bonds" for income-interested investors. Yet, a few years ago, insured bonds were rated AAA (not their underlying rating) and were touted and sold as high quality. We know what happened to the insurers and the bonds that were considered "high quality." Again, today, some bonds are being presented as AAA merely because they are "insured." These insurers could not cover defaults if they should occur, so why should the bonds carry that rating?
- A.G., FloridaYour point is well taken. Many of the bond insurers, formerly rated "AAA," have fallen from grace in recent years.
It is no longer a secret that the rating agencies, the bond insurers, along with most of Wall Street badly misjudged the risks associated with Mortgage Backed Securities.
The "AAA" bond insurers’ problems were not caused by their municipal bond portfolios, which for the most part contained solid credits prior to the insurance enhancement.
It should also be noted that, although downgraded, many of the insurers retain significant claims paying ability despite the fact they are not writing new business.
Hopefully, the rating agencies have learned from past mistakes and are now examining all the activities of the bond insurers before assigning them ratings.
Nevertheless, it is always prudent to examine the underlying credit worthiness of any security when contemplating your purchase.
Premium bonds often misunderstood
8/13/2010I bought long-term muni bonds last year with 5% to 6% coupons at below par value. They have returned regular income and appreciated in value. In six months, I receive a multimillion-dollar lump sum and want to purchase munis for income. If current prices don't change, then I would be buying bonds at a premium and building in a long-term loss. Should I buy anyway for the income or look for high-quality bonds that are nearer their par value?
- B.P., OregonIt is important to remember that buying a bond at a "premium" is not a "penalty." It simply reflects the appropriate yield for the current interest rate environment.
In fact, bonds trading above 100.00 typically offer the best values in the market. Ironically, this is the case because they are often misunderstood by individual investors who resist buying premium bonds because they perceive them as being more expensive than par bonds, misinterpreting the relationship between "dollar price" and "yield."
After quality considerations, yields are the key factors when evaluating the price of any bond. The dollar price is merely a mathematical function of the yield. Every dollar invested in a premium bond (including premium dollars) is working at the stated yields.
Premium bonds invariably carry a higher yield-to-maturity than par bonds of comparable quality, and if called, they will yield more to that call date than any par bond you could have purchased maturing in that year.
For more on premium bonds, click on the following article: "Hidden Gems in the Muni Market".
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.