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I'm even more confused from your article, “On Puerto Rico’s Finances, The Glass is Half…” I have a lot of Puerto Rico bonds. Is the situation improving or deteriorating? If I need to sell my bonds at a huge loss, I would like to do it before it is too late.- J.S., California
Actually, this is precisely what our article was intended to reflect. The title acknowledges that there is a great deal of disagreement, even among the most respected analysts.
We feel, however, that if investors are uncomfortable holding Puerto Rico bonds – or any other securities – they should consider reducing their exposure to these issues.
I hold Puerto Rico munis with a 15-to 25-year maturity timeline. What exactly happens if Puerto Rico munis were to be restructured? Would a restructure automatically involve all munis issued by the Commonwealth, or could revenue bonds stay outside of a restructure? By revenue bonds, I'm referring to COFINA (sales tax), PRASA and PREPA (utilities) bonds.
Good questions, but the details of any restructuring would not be determined unless or until such an event occurs.
As we saw in Detroit, the water and sewer system bonds were held to be a dedicated stream of revenue and thus exempted from the bankruptcy settlement.
I have a large portfolio of California municipal bonds with an average yield of about 5.20% and eight to nine years in duration. In the current interest rate environment, what maturity dates and quality would you recommend for additional purchases? I would like to obtain yields of close to 5.00%, but I’m concerned about buying long maturity issues if interest rates rise. Also, you talk about “longer-term” bonds. Are you referring to 30-year bonds only or 20 to 30, etc.?- L.C., California
Having visited our Web site, you may be aware we are proponents of buying high quality, longer-term bonds, which enables you to maximize tax-free income in your bond portfolio.
This additional income can often exceed the annual income of short-term bonds by more than 60% and enables you to reinvest at higher rates if they do become available.
This philosophy has successfully served municipal bond investors over the years. They recognize that neither they nor market "gurus" have the ability to accurately predict the direction of interest rates for any length of time. In fact, most "experts" have been calling for higher interest rates for years.
Keep in mind that you are buying tax-free bonds for the income. Sometimes over the life of these bonds they will be worth more than you paid for them, and sometimes less. Neither condition should prompt a sale. Bonds are purchased for income, not capital gains.
Today, for a California resident, the return on 5.00% in-state bonds can be comparable to earning 10% on taxable bonds for investors in higher tax brackets.
Regardless of any fluctuations in market value, the dependable stream of tax-free income provided by high quality municipal bonds can be counted on year after year. That's why you are buying bonds in the first place.
As to what we consider to be “longer-term” bonds, it depends on the yield curve at the time of the investment. Whenever we can capture 75% or more of the 30-year rate with a 20-year bond, we would opt for the shorter maturity.
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.