Municipal Bond Forum

I’m 35 and currently a California resident. If I buy really long-term California municipals with the intention of holding them until they mature, am I constraining myself for the tax benefits to remain a California resident for the long term? It’s too soon for me to know where I’ll want to live in five years, much less 30. If and when I move elsewhere, I could sell the California bonds and replace them with bonds from my new resident state, but that would involve transaction costs. Also, it would undermine the buy-and-hold strategy and put me at risk of selling at a discount. Are municipal bonds best as an investment for people who know that where they live is where they’ll always be? Thanks for a very informative site with well-reasoned and persuasive advice.

S.O., California

I own a number of long-term PA zero-coupon muni revenue bonds. All of the bonds are AAA insured — many are also ETM — and they reflect revenue from water and/or sewer systems. All of the bonds were listed as “non-callable” when I purchased them, with no conditions attached whatsoever. If the worst were to happen to one or more of the water/sewer systems whose bonds I hold (e.g., large-scale destruction or significant long-term disruption due to terrorism, major earthquake, etc.), can these bonds be called (i.e., paid off at less than par prior to maturity) even though they were listed as “non-callable” when I purchased them? Or would I still be able to count on the $1,000 per bond value at the original maturity date of the bonds? I have received much conflicting advice on this from different brokers.

A.B., Pennsylvania

Mr. Stewart may be wrong, but you don’t have a crystal ball, either. Bottom line: Mr. Stewart has no ax to grind. You, on the other hand, want to sell bonds now.

M.L., North Carolina

I am retired and 75 years old. I rely on a large portfolio of municipal bonds and income from my deferred income accounts to maintain my style of living. I hold the bonds to maturity or call and never pay attention to price fluctuations. I buy only high-grade bonds, 100 bonds at a time, (Aa1 or AA+ or better) and only pay attention to coupons that will maintain my income. I buy bonds where the yield-to-call is close to yield on new issues due on the call date. This always means premium bonds. I now find that to get coupons of 4% or 5%, I pay a higher premium price. Since these bonds mature in 15 to 25 years, and I have older bonds with higher coupons, and I have cash equivalents and constant withdrawals from my IRAs, I have no difficulty maintaining the desired income level with minimal change in my net worth. I would be much interested in your opinion of this strategy. Following your lead I avoid laddering.

R.Z., Florida

Given the past scandals involving brokerage houses and their former star analysts who were found not to have the best interests of investors at heart, how confident are you that the municipal bond insurance companies are themselves completely above board, and when the inevitable financial debacle hits the muni bond investor, that these insurance companies won’t rely on the SODDIT defense (some other dude did it)? Put another way, who is watching those who insure the municipal bond investor against default and how can an investor be confident in the financial stability of these companies?

L.C., New York

You received an e-mail from “P.W.” on 2/9/05 regarding the need to report a maturing tax- free zero coupon bond to the IRS. The 1040 schedule in which capital gains are reported asks for purchase and selling prices of a security. How should the tax filer make clear that the bond was a tax-free muni zero and, therefore, no tax is due even though there was a difference between the purchase and selling prices? Also, in your response to P.W., you stated, “Based on the original cost, munis can be subject to capital gains.” Can a tax-free zero muni be subject to capital gains? If so, how would this be calculated?

J.F.

Assuming an unrated municipal bond has the equivalent credit quality of, say a BBB rated municipal bond, what is the typical or average increase in basis points for being unrated, also assuming same maturity?

P.K. Colorado

I thought you might be interested in a Bloomberg article, “U.S. Bond Forecasters, Wrong on Yields in 2004, Blow It Again.” The best thing about this article is that these guys take no responsibility for their bad calls. They say that they will be proven right. Most of them have called for higher rates since Oct. 31, 2001, by telling people to stay short. They have cost investors billions of dollars. They just don’t get it.

B.N., West Virginia

At the start of Greenspan’s interest rate hikes, when the masses were calling for higher interest rates on bond yields, you were right when you stated that you would not be surprised if yields peaked. Now that it seems that the masses are lowering their yield expectations, I’m curious to know whether you think we might see higher rates again.

A.C., New Jersey