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Sell municipal bonds at a premium?


Let me start by saying I am a municipal bond fanatic. My portfolio is comprised of approximately 250 issues, every one thoroughly researched. In general, I am a buy-and-hold to maturity/call investor. However, premiums for some of my bonds have gotten so high that in my view it made sense to sell, capture the capital gains and redeploy those funds into other municipal bonds that are overlooked and mispriced in the market. Do you always buy and hold to maturity/call, or do you sometimes sell?



James A. Klotz responds:

We rarely advise our clients to sell their bonds, even when large premiums can be captured. Our philosophy is, sometimes your bonds will be worth more than you paid for them, and sometimes less.

If you take profits on your bonds, it is tantamount to attempting to predict the future direction of interest rates, and that usually proves to be an exercise in futility.

Remember, economists have been predicting the end of the bull market in bonds for at least 10 years. We are sure you didn’t anticipate this level of current interest rates either.

Keep in mind, if bonds are sold at current rates in a non-qualified account, you will have a capital gains tax to pay. You will be selling into the bid side of the market and replacing the bonds on the offering side. This spread will certainly eat into your profits.

In addition, you will be unable to replace the income you are sacrificing. However, you will be able to increase your principal.

As you can imagine, we’ve recently been asked this question many times. We explore it in more detail in our article, “Time to Take Advantage of Rising Muni Bond Values?

We’re delighted to know you’re a municipal bond fanatic. Having served municipal bond investors for more than 40 years, we are, too!

Nov 15, 2021

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     The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk