Municipal Bond Forum

I was surprised by your Bond Forum item (“Disappointed in closed-end bond fund”, 3/3/08). I believe your statement that closed-end funds are experiencing a wave of redemptions is not quite accurate. The basic premise of a closed-end fund is a finite number of shares and to trade in the market at a price that is either connected or disconnected to the net asset value of the fund. Should someone wish to sell their share, they do it in the marketplace. At times, there may be more sellers than buyers or buyers than sellers, which can cause the discount to widen or narrow to the net asset value. As a registered investment advisor who specializes in the closed-end format, we have found that our selection of closed-end funds can and does beat benchmark returns over longer periods of time or an interest rate cycle. Diversification is a key ingredient that closed-end funds afford the individual investor along with professional management. Purchasing a fund at a discount further adds to current returns. Tax efficiencies are more profound that individual bonds. The auction rate preferred shares used for leverage have been involved in failed auctions, which can create a higher cost of leverage for the funds, but is starting to stabilize according to historical averages.

S.T., New York

You have made a case against laddering, but did you ever consider that some of us are retired and need this income to live on? We can’t reinvest the income of these bonds as you showed in your examples. What do you suggest to the people in their 70s and over who need more income? We need to preserve our principal in order to continue investing it.

A.L., Florida

Can you explain why some territorial paper from Guam, Puerto Rico, etc. is listed as being insured by SMBIA, SFSA, SCIFS, etc? Are they the same as MBIA, FSA, etc.?

B.F., New Hampshire

You say, “Bond Insurers are only compelled to pay principal and interest if the underlying borrower cannot do so.” Does this mean that the insurer is obligated to pay to the bondholder the future interest stream on the defaulted bond as well as the principal at term in the same manner as the original borrower? Or does this mean that the insurer is only obligated to pay to the bondholder the principal at the time of default? In other words, the bondholder is guaranteed only the return of his principal and will forego the future interest stream of the original bond.

C.E., California

Your article did little to put my mind at ease. First, you repeatedly referenced AAA-rated bonds, but what about lesser grades, although higher than BBB? Seems you’re hedging your comments. And my understanding is that some of these bonds only get the AAA rating because of the insurance, so the underlying rating is less than that. Second, you say MBIA reports that it incurred losses on only 102 transactions of 93,211 issues in its 30-year history. That’s about one loss in every 900 issues. Seems relative high to me, given that the entry rating to get insurance is – as you say – an investment grade BBB. Third, in the last 30 years (or longer) we have never been in a financial climate like we are now. You are obligated to try and ease the concerns of your investors, but you are in an unenviable position of having a serious conflict of interest in trying to persuade us that all is well. I can’t sleep any better based on what you are telling us.

D.W., California

How does the subprime problem affect municipal bonds? Will there be a recession? I personally would be wiped out financially if the municipal bond market failed. What are the real risks in municipal bonds?

D.S.

I am 80 years old and have quite a few municipal bonds. What happens to these bonds in a recession or depression? I understand that there are tax-free money market-like bonds that mature weekly but can be rolled over until cash is needed. Is this true? If so, how does one buy them, and what does it cost to buy & sell them?

D.D., Maryland

I am a large holder of California general obligation bonds, which continue to drift down in price. I understand they are obligated by constitutional mandate to pay, but we are seeing many heretofore unheard of events lately. Should I remain confident in the state’s obligation, given the Legislature’s inability to make headway on this huge projected shortfall?

M.J. California

I am 63, my wife is 61 and we both work full time. In February 2009, we will receive approximately $250,000 from maturing CDs. Since we were just badly hammered by the Alternative Minimum Tax (AMT) for the first time on our 2007 taxes, I considered acquiring Virginia AMT-free municipal bonds next year with the CD proceeds. In view of our ages and probable retirement within five or six years, I assumed that acquiring bonds that mature in 10 years would be appropriate. I see that in the Forbes article, “Supercharged Munis,” you recommend putting $100,000 into four different tax-free bonds, though I’m not sure whether that should be divided among four bonds or that $100,000 should be put into each of four bonds. In any event, what do you suggest I do with an amount such as $250,000? If you suggest muni bonds, how many would provide adequate diversification and what maturities would you recommend?

P.R., Virginia