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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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On Suze's take


Suze Orman (“Suze Orman, James Tisch on Common Ground”) didn’t address the concern that if interest rates go up, a purchaser may regret not waiting to get the higher rate. It may be that it's still better than the 1% taxable at an FDIC-insured institution, and that a bond purchaser can always hold back some funds and ladder. And, of course, there is no perfectly safe, highest rate guaranteed investment. Bonds are a good part of a balanced portfolio, but Suze's assessment is very limited.

- V.L., Florida
James A. Klotz responds

We agree with Ms. Orman's approach to the municipal bond market.

More than 40 years in this market has taught us that attempting to predict the direction of interest rates is a futile exercise, even for the most renowned economists. In fact, most of these "seers" have been warning of rising interest rates for more than a decade.

The "cost of waiting" in a CD or sacrificing 40%-50% of available, reinvestable, tax-free income by laddering can be extremely prohibitive. In our experience, it has been the investors with laddered portfolios who have expressed regrets as they have been forced to reinvest their maturing bonds at lower and lower rates. Waiting in a money market, for any period of time can make it almost impossible to recover the income forfeited by not buying the longer-term bonds.

There is no question interest rate fluctuations will impact the market value of your bonds, which is why we continually state that over the life of your longer-term bonds, they will sometimes be worth more than you paid for them and sometimes less. Neither occurrence should trigger a sale.

The bond portion of your investment portfolio is designed to provide income, not capital gains.  Maximizing your tax-free income on every purchase produces more reinvestable income that can enhance your portfolio's yield when rates are rising.

Today, due to the mass liquidation of muni-bond fund shares, higher yields have resulted in improved valuations and greater protection against further price declines if Treasury rates do rise. Munis typically trade at a ratio to Treasuries of approximately 90%. Today this ratio is more than 110%.

Perhaps this is what captured the attention of Ms. Orman and Mr. Tisch.

Beware of tobacco bonds rated below investment grade


In your article, “Clouds Darkening for Tobacco Bonds,” you don't mention the status of tobacco bonds that are insured. I have California tobacco bonds insured by BHAC. Should I be concerned?


- R.G., Texas
James A. Klotz responds

Your state-enhanced BHAC-insured California tobacco bonds should not be confused with those referred to in our commentary. Your bonds carry high investment grade ratings by Moody's and Standard & Poor's (Aa1/AA+).

Our message is aimed at investors holding tobacco bonds that have been downgraded below "investment grade," particularly if their investment objectives do not include speculation.


Tobacco bonds that make the grade


I imagine Chicago’s plan to increase cigarette taxes, which you discussed in your article, “Clouds Darkening for Tobacco Bonds,” will cause problems for Illinois tobacco bonds. I purchased Erie, New York, tobacco bonds, rated BBB/BBB+, first tranche taxable. The maturity date is 2028 but they pay faster as all principal reductions for the bond issue go to the first tranche. Are you concerned about these types of bonds?


- S.Y., Maryland
James A. Klotz responds

Under the Master Settlement Agreement, the amount of revenue due from tobacco companies is based on general cigarette sales throughout the United States. Any regional impact would result from the particular structure of the bonds issued by the individual states.

Your Erie County bonds are refunding securities issued in 2005 and, as you say, still maintain investment grade ratings by both Moody's and Standard and Poor’s. Their "turbo" structure has provided for the rapid pay-down to which you refer. We are quite comfortable with this issue.

The intent of our commentary was to alert investors with medium or low risk tolerance that many tobacco securities purchased as "investment grade" are now rated below this standard.


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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.