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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 defaults are rare
10/14/2009I have been told that certain municipal bonds contain a clause that requires the issuer to pay bond debt before all other local expenses. Is this the case? If so, how can I decide which offerings have such a clause?
- J.N., IowaMost municipal bonds contain security pledges that place payment of the debt as a first lien on revenues received by the issuer. This may not be universally true, but holds for both general obligation and revenue bonds. This structural priority of lien is partially responsible for the low default rate for municipal bonds and their wide popularity. How this structure is implemented varies from issue to issue. To determine the exact methodology used in a specific issue, investors need to review the Official Statement accompanying the issue where the security provisions of the bonds are described. Rating agency reports released at the time of issuance also describe the priority of debt service payment lien since this is a principal rating factor.
Outlook for interest rates
9/21/2009I have recently invested in municipal bonds through your firm and a Vanguard long-term, investment-grade bond fund. My goal is to achieve distributions of at least 5%, as I plan to retire at the end of this year. My concern is that the value of the investments will go down once the economy recovers. What is the outlook for interest rates to increase and bond values to retreat?
- B.E., IllinoisWe are not aware of anyone who has been able to successfully predict the direction of interest rates for any reasonable period of time.
Long-term municipal bonds are purchased for the tax-free income they provide, with the understanding that market values will fluctuate. Most bond investors employ a buy-and-hold strategy and rarely sell their securities, making the value of their holdings irrelevant. A good example of this was evidenced a year ago when the Wall Street meltdown precipitated a dramatic decline in the value of all tax-free bonds. Today, most bond prices have completely recovered from that swoon.
Although the current economic environment of no or slow growth, high unemployment and low inflation are not traditionally the ingredients that produce higher interest rates, there are no guarantees. The only thing we can predict with any certainty is that over the long haul, interest rates will rise and fall.
For these reasons, we continue to recommend only investing funds that are available for the long-term and maximizing your income on every purchase.
This additional income, not available on short-term bonds, will enable you to ride out interest-rate fluctuations, which are inherent in every business cycle.
Why specialists matter
9/15/2009You say, "Today, the ability to research a bond issue and have the necessary financial disclosure documents available have never been more important,” and “… investors should seek out a bond specialist to provide the vital research required to make intelligent investment decisions." From this, might we deduce that a bond recommended by my FMSbonds agent Jason Berwick should be further researched? Each time I consult my Edward Jones broker, his reply is simply, "It is not in our system," indicating that it is therefore not reliable. It is quite confusing.
- D.B., MissouriYour e-mail crystallizes our point.
I am confident that any stock you mention to your Edward Jones broker will be in his "system." Conversely, FMSbonds would not offer an opinion on any stock since this is not our area of expertise.
Because we specialize exclusively in buying and selling municipal bonds, all recommendations made by Mr. Berwick have been thoroughly vetted by our research department before they are offered to you or any client.
We will not recommend any tax-free bond if we are not comfortable with its credit quality.
With all due respect to your broker, no one can be expert in all markets. Bonds are all we do. If your broker was a specialist in municipal bonds, he would have access to all the information referred to in our commentary, whether his firm recommended them or not.
The fact that it is not in his “system" should not be interpreted as indicative of anything but lack of information.
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.