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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.
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Essential nature of munis recognized by many
12/11/2012Based on your recent article, “A Lifeline After Sandy” and efforts in Congress to change or abolish the muni bond tax exemption, doesn't it make sense for you to start a petition or letter to Congress signed by all of your muni bond clients? More than 50% of bond investors make less than $200,000 a year and any change will drastically hurt many retirees living off the income.
- J.C., CaliforniaMunicipal bonds are critical in funding a wide range of public projects across the country. As you would expect, numerous groups are urging Congress to resist efforts that would adversely affect the market. Here’s an excerpt from one recent statement co-signed by the National Governors Association, National Conference of State Legislatures, National League of Cities and 17 other groups in the wake of Hurricane Sandy: “As the country looks for ways to rebuild from this storm and the overall $4 trillion infrastructure deficit, we urge Congress to strengthen, not weaken, the tax-exempt bond market because of its essential role in financing our nation’s infrastructure needs.” Many others echo those same sentiments.
The lone voice
11/28/2012Why does a CNBC analyst say municipal bonds are bad investments and should be avoided? I hold many munis.
- R.D., VermontBecause we didn't hear the interview, we can't comment on what was said. But for every pundit who says sell muni bonds, there are two who recommend buying them.
Municipal bond funds have experienced inflows of cash 47 out of the past 49 weeks. Clearly, investors are not worried.
Why would heirs liquidate bonds?
11/26/2012I’m thinking of buying long-term bonds but I’m worried that upon my death, my estate may have to sell the bonds at a loss if interest rates have risen above the bond interest. I understand that for every 1% rise in interest rate, bonds decrease 3%. Am I correct in this?
- C.C., CaliforniaYou are correct in thinking that, as with any investment, the value of your municipal bonds will be subject to market conditions at any given time prior to maturity.
We are not sure, however, why you would assume that your heirs would liquidate the bonds rather than maintain them, and why the market value would be below your original cost. Long- term municipal bonds purchased over the past 10 to 20 years, if not previously called, could likely be sold today at substantial profits.
Another factor to consider is that during the period you enjoy the extra tax-free income afforded by long-term bonds, their market values will be increasingly supported as they approach maturity.
It is impossible to apply the type of "rule of thumb" you are attempting in your interest rate example. There are too many variables involved that determine the shape of the yield curve and the relationship between short- and long-term interest rates.
Additionally, we continually caution investors to avoid the futile pursuit of trying to predict interest rates.
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.