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Short-term munis sacrifice income


I’m currently with (a large stock brokerage firm) where I hold over $300,000 in California municipal bonds. Income comes to $12,000 – $13,000 a year. It is one of the better plays in my portfolio. I asked my advisor there if perhaps I should increase my munis, but he was adamant that rising rates will work against them. Looking at other fixed-income choices certainly has not excited me. If I invest another $250,000 in diversified munis with a duration of about seven years, what would be your choices through FMSbonds?

H.C., California


James A. Klotz responds:

Actually, we are proponents of buying long-term bonds to maximize tax-free income which, after all, is the reason for buying munis.

Seven-year, high-quality California bonds will yield approximately 2% tax-free, whereas long-term California bonds of the same quality will yield close to 4.00%. Buying the shorter-term bond will sacrifice 50% to 100% of the available income in the market.

In our experience, the short-term bond buyer usually rolls his bonds over for another seven years and continues to forfeit income.

I think it would be helpful to give us a call and talk to one of our bond specialists regarding your various options. Munis are all we do at FMSbonds. The fine folks at your brokerage firm do not claim muni bond expertise.

Feb 7, 2019

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