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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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Why are some cities and states rated higher than the Treasury?
4/23/2012I have a question about the way rating agencies work. Certain municipalities across the nation and in California are rated “AAA,” while the U.S. Treasury is rated only “A.” This discordance is silly. What are your thoughts?
- J.S., CaliforniaOn August 6, 2011, Standard & Poor's downgraded the U.S. Treasury from “AAA” to “AA+,” where it remains today. Moody's & Fitch have continued to maintain their “AAA” ratings on the U.S. Treasury, but have added a "negative outlook" designation. Negative Outlook means that over the longer term these ratings will be reviewed for possible adjustment.
States and municipalities are not permitted to run deficits, sovereign governments can.
Escrowed vs. pre-refunded muni bonds
4/23/2012What distinction exists between escrowed and pre-refunded municipal bonds? Also, does it only make sense to invest in these types of bonds.
- N.M.In the bond market, the term "escrowed" refers to the process of replacing the original obligor of the bonds by securing them with other types of securities, usually U.S. Treasury obligations.
"Pre-refunded bonds" are escrowed until they can be retired at an applicable call date.
Bonds can also be "Escrowed to Maturity" (ETM). These bonds will not be retired prior to maturity other than through a sinking fund call or if the stated call features have not been defeased.
There are many municipal bonds that provide excellent security without confining yourself to escrowed bonds, which offer a limited return on your investment dollars.
One of the few times we suggest a client sells his bonds is if they become pre-refunded.
'Avoiding the foul tip!'
4/23/2012I enjoyed your piece, “The Mets, the Pundits and the ‘Old Perfessor,’” about the prevalence of bad advice offered by so many so-called experts. I have found that some brokers recommend new issue long-term bonds hot off the press with miniscule yields. Your firm offers previously issued bonds trading with significantly higher yields to call. Maybe a follow-up to your article could be entitled, “Avoiding the Foul Tip!”
- I.S., New YorkThanks for the kind words and the astute observation.
Sophisticated muni buyers recognize that value is all about yield. In today's market the best values are found with bonds that trade above 100.00.
If priced properly, these bonds will provide a considerably higher yield-to-the-call date than available on a new issue due the same year, as well as a higher yield to maturity than a comparable quality new issue.
The reason is simple: many inexperienced investors are averse to paying above 100.00. They don't understand that every dollar invested (including premium dollars) is working at the stated yields.
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.