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Is your strategy always to buy the best yield possible and hold? Is there ever a reason to sell or wait to buy for better yield? In the current environment, conventional wisdom says that I should construct a bond ladder, don't go too long in search of yield, etc. But if I am buying for income and a better return for the amount of risk, is there an argument for buying shorter-term munis, maybe less than seven years?- K.K.
You have defined our municipal bond philosophy quite accurately: We recommend, after your credit quality requirements are satisfied, maximizing tax-free income on every purchase. Invariably this requires buying longer-term bonds.
Our buy-and-hold approach means we never suggest selling bonds to take a profit, as you will be unable to replace the income and will create a taxable event.
On the other hand, we often recommend executing "tax-swaps." A loss for tax purposes can be established by simultaneously exchanging some of your bonds that are depressed in value for similar bonds. We employ this strategy for clients who want to offset capital gains taxes, or reduce adjusted gross income by $3,000.00 per year. These tax losses can also be carried forward into ensuing years, dollar for dollar.
Buying short-term bonds can sacrifice 40% to 50% of reinvestable tax-free income. And tax-free income should be the reason you are buying municipal bonds in the first place.
Keep in mind, over the lifetime of your long-term bonds, they will sometimes be worth more than you paid for them and sometimes less. With a long-term investment horizon, this becomes irrelevant. It is also worth noting, tax-free bonds can pass through your estate as easily as cash.
“Buy-and-hold” strategy -- impacted by the Detroit bankruptcy?- S.T., Washington
If you are asking if the Detroit bankruptcy will cause us to change our general philosophy of buy and hold, it will not.
We do, however, on some occasions recommend the sale of certain bonds when there are fundamental changes in credit quality outlook.
Detroit falls into this category, as it had experienced multiple credit downgrades in recent years. This was not a difficult crisis to predict.
The insight in your article (“Amid Detroit Crisis, a Key Player Emerges”) applauding the virtues of bond insurance brings to light that with the exception of AGM, National and BAM, all other bond insurers are still in a serious financial state. This is largely due to their ill-advised venture into insuring toxic mortgages. Would you care to comment?- N.M., New Jersey
Actually, we did point out the missteps of the bond insurers during the financial crises and, as you say, a good number of them have not retained the financial stature they once enjoyed.
More important, however, is many more insurers than you mentioned, such as ACA, Radian and Ambac, still have ongoing claims-paying ability and are also taking an active role, at their own expense, in protecting the interest of bondholders.
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.