FMSbonds, Inc.’s Municipal 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, and other members of the firm as noted.
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I have been retired since age 55 and done reasonably well on my investments. As I approach the magic age of 59 ½, I am considering moving some of my money into bonds with the hope of just living off the dividend income. Since the vast part of my investments are in IRAs, is there any advantage of buying municipal bonds inside the IRAs? I thought that the dividends that I would be taking might have some tax advantage.
R.T.
As a client of yours, and a reader of your bond forums, which I really enjoy, I had some thoughts on your article. What you wrote makes sense, but what would be the problem with buying a 10-month or one-year CD, which is paying close to a 5% yield, and after the maturity of the CD, investigate yields of long-term munis. Can long-term muni bonds go any lower? I don’t think so. At some point the yields would have to rise. Does this make sense?
D.P, Florida
Cigarette sales have dropped, and because industry payments to states are based to some extent on the number of cigarettes sold, the states’ settlement revenue has dropped. States that were part of the settlement initially expected about $6.5 billion this spring, for instance, but the tobacco companies have said that they may be entitled to cut their payments by as much as $1.2 billion this year. Some of that decline would be the result of dropping sales, and some could come from other adjustments allowed under the settlement. Since state obligations under the tobacco bonds is limited to settlement proceeds paid by the tobacco companies, how would declining receipts impact the credit worthiness of tobacco bonds?
J.S., Washington, D.C.
If tobacco bond indentures include covenants that would sanction changes in their payment obligations if the MSA were modified, is it conceivable that government tobacco bond issuers might try to minimize payouts to better reflect tobacco firms’ reduced MSA payments? Would such bond indenture changes withstand legal challenges?
J.S.
To what extent are foreign purchases of longer-term treasury securities responsible for the present slope of the curve?
So you’re saying, don’t keep your eggs in one basket? If I can get a higher yield short term with a portion of my portfolio, and swing the higher yield earned into the long terms (before they’re bought out), that would be the best, right? Thanks for your thoughts. Your article was short, precise and good for average investor like me!
S.P., New Jersey
I understand that certain bonds, particularly facility revenue bonds (i.e., hospital or housing bonds), often will carry an ERP (Extraordinary Redemption Put) call feature to cover a cataclysmic event to the facility whereby the bonds could be called, typically at par. In the case of an escrowed bond whose underlying facility has such an event and their bonds are called, would the escrowed bonds also be called? Assume that the bond has been properly defeased and now has Treasuries supporting the payments and redemption. Could, or why would, the bond be called? It is no longer dependent on the revenue stream of the facility.
J.M., Michigan
After following your Web site and recommendations for several years, I decided to purchase some bonds from you. When I went to open an account, the very first question I was asked was my social security number and date of birth. If I opened an account, I would expect to give you my social security number, but my birth date is none of your business, except to assure that I am a legal adult. Consequently, I have given up the idea of switching brokers. You might want to rethink your policies.
With the inverted Treasury yield curve and the muni bond curve being visibly flat, do you still advise investors to buy long muni bonds? Why would one want to risk buying long-term bonds when there is no reward to extend out in the curve? What do you think about investing 80% of one’s portfolio in short term bonds and 20% in equities?
M.V., California
I recently purchased several closed-end muni funds at a 12% to 15% discount to NAV. On average, the funds all contain at least 75% AAA bonds. How does one compare this fund “discount” to owning individual bonds?
M.S., Florida
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