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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 would heirs liquidate bonds?
11/26/2012I’m thinking of buying long-term bonds but I’m worried that upon my death, my estate may have to sell the bonds at a loss if interest rates have risen above the bond interest. I understand that for every 1% rise in interest rate, bonds decrease 3%. Am I correct in this?
- C.C., CaliforniaYou are correct in thinking that, as with any investment, the value of your municipal bonds will be subject to market conditions at any given time prior to maturity.
We are not sure, however, why you would assume that your heirs would liquidate the bonds rather than maintain them, and why the market value would be below your original cost. Long- term municipal bonds purchased over the past 10 to 20 years, if not previously called, could likely be sold today at substantial profits.
Another factor to consider is that during the period you enjoy the extra tax-free income afforded by long-term bonds, their market values will be increasingly supported as they approach maturity.
It is impossible to apply the type of "rule of thumb" you are attempting in your interest rate example. There are too many variables involved that determine the shape of the yield curve and the relationship between short- and long-term interest rates.
Additionally, we continually caution investors to avoid the futile pursuit of trying to predict interest rates.
Better late than never
11/26/2012I just read an article on Vanguard’s Web site that discussed the “non crisis” in the muni market. It occurred to me that you wrote the same thing more than 1 ½ years ago in your article, “A Funny Thing Happened While the Pundits Were Screaming.” I bet this guy makes the big bucks for his expertise!
- J.S., PennsylvaniaSure it’s late, but better late than never. Investors need this information to counter the pundits whose sole objective is to garner sensationalist headlines.
When will we see more muni bonds, higher rates?
11/14/2012I read your article “In Fiscal Cliff Debate, One thing is Clear,” and I agree the No. 1 investment for investors is tax-free bonds. I'm a poster boy for tax-free bonds and have been buying bonds for the past 20 years. In fact, I have several million dollars worth of bonds with your firm and have enjoyed my buying experience with Andrew Blum. When will the supply of munis increase, and when will we start seeing those long-term 5% yields at par?
- L.S., TexasAlthough we never found it fruitful to predict the future, our guess is we will not see increased borrowings, or the 5.00% bonds for which we are all longing, anytime soon.
The Fed tells us we will be in a low-interest-rate environment for the foreseeable future. In addition, many of the tax-reform proposals being bandied about on Capitol Hill call for restricting the type of entities permitted to issue tax-free bonds (less supply). When combining these factors with the prospect of meager economic growth, our guess is that all fixed-income rates will be moving lower in ensuing years.
In regard to munis in particular, it is also worth noting that many state and local governments are still grappling with fiscal imbalances from past years. They will not be anxious to compound these problems by taking on new debt.
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.