Municipal Bond Forum

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.

Postings are listed by date. If you have any questions, please call us at 1-800-FMS-BOND (1-800-367-2663) or e-mail us.

HQLA Rule Change Good For Muni Investors

I’m surprised by your article, “House Votes To Treat Munis As ‘High Quality’ In Bank Rule.” Munis mainly trade by appointment only, and based on my own experience during the 2007-2008 crisis, there was a lack of liquidity in munis, with prices taking a beating. Now, don't get me wrong, as I bought into the distress we were experiencing back then and wound up with very profitable positions in the end. But given how few munis trade in any size, other than maybe “AAA” and “AA” bonds issued by states, I'd hardly call munis a highly liquid class of instruments. I think the House bill is ill informed. In the past, you’ve said munis are bought mainly to buy and hold until maturity by retail investors, so why would those types of investments now be considered good sources of liquidity for big banks during times of stress? Seems a bit disingenuous to me, given all your past postings.

But what about inflation?

In your interesting article, “Just How Smart is the ‘Intelligent Investor’?” you seem to avoid considering inflation. While it's low now, historically, it can be quite high. Thus, a 4.00% real yield for a long-term bond can be eaten by inflation down to almost nothing or worse by the end of its term. In addition, though the risk of default is small, it is no longer as small as it was in the past. I've had several bonds default in whole or in part. In addition, if for any reason you need to sell the bonds and the interest rate has moved up, as it most likely will, you will lose capital. For those reasons, long-term-munis are not as attractive as you present them. But I bet you knew all that! I’ve been in and out of munis for more than 30 years.

Bogus yields

I read both the Wall Street Journal article and your response, “Just How Smart is the ‘Intelligent Investor’?” I think the WSJ article really was saying that some muni bonds and dealers state the "distribution yield" to their clients, in addition to the yield to worst and yield to maturity. Many clients probably don't bother to understand what they mean and falsely interpret distribution yield as if it is a meaningful number. In my opinion, and hopefully yours, it is an irrelevant and meaningless number. I recognized that when I bought my first muni bond, but I am a highly analytical type. I would venture to say that most muni bond buyers are not so mathematically inclined. Probably "distribution yield" should never even be mentioned because the mere mention of it conveys the impression that it has some relevance. That was my takeaway from the WSJ article, and I agreed with that message because I'd already reached the same conclusion.

Only person happy for churning is your broker

Your “Just How Smart is the ‘Intelligent Investor’?” article should be required reading for anyone who buys individual municipal bonds. Family members for whom I help manage some their assets, including significant holdings in municipal bonds, think of bonds as trading mechanisms, not holding securities.

‘Ask this very important question’

Do the worst case yields cited by your firm account for an adjustment of principal in the return? In a recent Wall Street Journal article, the columnist advised bond buyers to ask this very important question.

Knowing the yield to maturity, yield to call on your bonds

A recent column in the Wall Street Journal said brokers overstate the yield on municipal bonds and that 4.00% returns on a bond are an illusion. On my bond purchases from FMSbonds, I always know the yield to maturity and yield to call. I have enjoyed purchasing many bonds from FMSbonds in 2015 that pay over 4.00% and, in a few cases over 5.00%. Can you address this please?

Possible impact of rate hike on fund

So let’s say the Fed goes crazy and raises rates a whopping 1/4%, as you suggest in your article, "The Fed Didn’t Move. Cue the Conjecture." What kind of impact will this translate to someone who owns a high-yield muni bond fund? If you had a liquid $50,000, what would you do with it, if you could only invest for six months?

Puerto Rico's January 2016 G.O. payment

I read that Puerto Rico stopped setting aside money to pay the General Obligation interest payment in January 2016. Do you think this is indicative of their intent not to make the January 2016 payment?

Puerto Rico: No answers yet

What are some of the scenarios we bondholders can now expect concerning the outcome of the Puerto Rico debt problem?
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