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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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Treasuries yielding little
4/24/2009I own 4 million in short-term treasuries that are not paying any interest to speak of. Is this a good time to buy California munis or should I wait until interest rates rise?
- C.C., CaliforniaWe are not convinced that interest rates will be going up, especially on municipal bonds, which are trading at historically high yields when compared to taxable Treasury bonds.
If your investment funds are earning less than 1.00% in Treasury bills for any length of time, regardless of how high rates go (if they do rise), it will be almost impossible to make up the income you could be earning on a 5.50% or 6.00% municipal bond.
You may want to consider wading into the market by investing a portion of your investable dollars in high quality California municipal bonds. There is no need to commit all of your funds to the municipal market at once.
Is history a predictor of rates?
4/23/2009Between 1980 and 1982, yields on fixed municipal bonds fluctuated between 8.5% and 14%, CPI declined from 14% in Feb. 1980 to 7.6% in Feb. 1982. Does history predict the future? How high do you anticipate inflation to rise over the next year or two? Do you anticipate it to stay elevated for an extended period? Do you expect there to be a direct correlation (as in the 1980s) to the muni yield?
- S.L.D, ColoradoThere will always be a relationship between inflation and all fixed-income investments, since inflation erodes the value of fixed interest payments.
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.
Tobacco bonds mirror market
4/22/2009I own a D.C. tobacco bonds in my account at FMS. Despite your optimistic view, I have noted its continual decline in value this year to a current 63.624. Why is that?
- M.T., FloridaThis year has seen a major market dislocation as large institutions and mutual funds have been forced to sell bonds at depressed prices to meet redemption demands. As a result, bond prices have fallen to levels far below the intrinsic value of the actual instruments. The vast majority of bonds continue to pay principal and interest in a timely manner as they always have. This goes for tobacco settlement bonds as well. We see market prices as undervaluing the steady cash returns that tax exempt municipal bonds have provided for many years.
In the specific case of tobacco bonds, the same forces battering the rest of the market apply here as well. So, despite victories in the courtroom, the tobacco sector has seen values fall, reflecting overall market conditions.
A recently enacted increase in the Federal excise tax on cigarettes from 39 cents to $1.01 per pack has also had an adverse impact on the market values of tobacco bonds, since its effect on cigarette shipments is uncertain. In the past, when states have raised their excise taxes, there is initially a shipment decline, which has been followed by a rebound to more traditional shipment levels.
Tobacco bonds have provided steady returns to their owners and the tobacco companies remain highly profitable.
As always, we will continue to monitor this sector.
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.