Municipal Bond Forum

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

I was very pleased to stumble across your Web site and find a firm that supports my investment strategy. I therefore trust your answers to some questions that I have (and believe me, that says a lot). My family has invested in municipal bonds for generations and I have followed suit. I am currently managing my portfolio exactly as my father and grandfather do, but I have some questions that I would like you to answer because their answers are simply that it’s “the way we’ve always done it.”

First, I only buy long-term premium munis for the highest Yield to Call/Yield to Maturity that I can find, exactly as you suggest. I normally wait for the interest to build to a certain amount before I buy another bond. I do this because I can get a better price by buying a bigger chunk of bonds. It takes a few months to get to this point, and I sit on the cash in the meantime. (It’s actually in a type of money-market account.) If I don’t need all of the income to live off of, how would you suggest investing it until I have enough to buy another bond?

Second, I currently live in Washington, D.C., where my munis from all over the country are triple exempt. If I decide to move to New York for a few years with the intention of returning to D.C., what would you recommend doing? I obviously don’t want to liquidate my holdings and reinvest them in N.Y. bonds because, for one, I would get hosed on the bid/ask spread. Should I just weather the few years and pay the state and local tax? Third and finally, when a muni is pre-refunded, do you recommend selling it?

T.B., Washington, D.C.

I am in a bit of a quandary. I am attempting to find specific information on CABs (Capital Appreciation Bonds), such as how they work exactly and the relation to a refinanced structured loans. If you could provide any reference material or point me in the right direction I would greatly appreciate it.

J.A., New York

I am interested in municipal bonds that are pre-refunded and collateralized in U.S. securities. The maturity can go way out, as I want high interest. Why do you rate some of the municipal bonds insured by MBIA as AAA? Do you think MBIA could weather two or three bankruptcies in municipal bonds? I think it’s doubtful. I consider insurance on municipal bonds valueless. Are you a member of CIPA or SIPC?

D.J.

I have been investing in municipal bonds for the last three to four years simply because they provided a reasonable rate of return relative to risk. I have noticed that the high yields and early call dates are related. What I mean is, when the rates (yields) are at historic highs, the issuer usually puts in a call date at five to 10 years on a 30-year bond. So there is no point in waiting to time the market (assuming you can do it) because you can’t really lock in the rate for 30 years. If rates do fall five to 10 years from the issue date, the issuer can call. I observed this on the following basis. If rates now (about 4.5%) are low compared to historic highs (10 to 12%), then I do not see any bonds available today with a coupon of 10 to 12% at a high price to compensate for today’s relative lower rate. Given this, there is no reason to wait to lock in a rate even if there is a fairly general consensus that rates will go up in the next year. In your long experience, have you seen bonds issued at high rates (10%) comparable to long-term S&P average rates without call features? Did anyone get lucky?

K.K.

I have one primary requirement before purchasing a bond: I must have the certificate mailed to me after the purchase. I understand that it’s inconvenient when selling the bond, but that is not a concern. I do not actively trade in the bond market; rather, I keep the bonds to maturity or the call date. Do you provide this service, and if so, what is your charge to register the bonds in my name and have the interest payments sent to me directly through the paying agent?

J.M.

Your article  “ETMs and You” hits the ETM issue right on point, but there is one item that still is rather perplexing: In the case of the New York City escrowed bonds or any other ETMs with call provisions, why would the bonds be called? I understand that any “profit” from the underlying Treasury price appreciation is kept by the IRS, so financial motivation seems to be ruled out, unless there’s some nominal administrative expense associated with keeping the bonds outstanding. Could this be it or is it something else?

J.M., Michigan

My county wants to issue $60 million in bonds for capital improvements to our school system. Many question the advisability of using bonds vs. some other form of ad valorem tax or use of a lottery or sales tax. I think alternatives to the bond issue might, in the long run, be more expensive and less suitable to the intended purpose. The bond issue seems to be advantageous in that it obtains the money up front and is, in effect, a sunset law that expires on the maturity date. As we all know, taxes go on forever, even after the original purpose has ceased to exist. Further, the cost to the taxpayer will be less with a bond issue than with any other means of obtaining funding. Assuming a 30-year issue with a base interest rate of 4.5%, the county would need to raise about $2.7 million annually for interest payments and create a sinking fund of under $2 million to cover payments at or before maturity. These funds could likely be obtained by some form of property transfer tax, so future residents would be assuming a fair share of the school expense burden. Am I off the wall? Is there a better way to raise this money? If bonds are the way to go, what interest rate and term should be expected?

D.C.