Municipal Bond Forum

In your article on laddering, you don’t address the situation where the investor uses the income each year and perhaps some of the principal, especially in a rising interest rate environment. Surely you don’t believe long- term interest rates will not be in a significant uptrend the next 10 years.

A.B., Florida

You are correct on a 10-year ladder and if you don’t need to sell during the period, but I was a bond broker for years and now have 50% of my account in munis. In the early ’80s, I experienced some long bonds going from par to 45 bid. I still ladder and have maturities every year out to 30 years. I remember Sen. Mark Hatfield’s idea to tax munis. Franklin Funds put millions out for the bid to meet redemptions. We had a field day.

W.H., California

I disagree with your points concerning the drawbacks of ladders. You’re not accounting for credit risk, for which you’re not well compensated for going out longer. In a ladder structure, being able to keep buying 10-year bonds is, in effect, a free lunch. The ladder gives you more access to your cash to meet cash-flow needs. Long bonds are callable and are not efficient investments, and they can be called at the worst time for the investor. Going long term only works in combination with a mostly equity portfolio, say, 70 percent or more.

A.S.

I own over 200 individual, mostly insured municipal bonds not subject to the AMT. I’ve acquired these different issues over the past 20 to 30 years. They were not purchased for gain or loss, though I have taken some gains as they present themselves. With the portfolio now decreasing in value, I don’t anticipate any sales. Despite possible inflation and defaults by insurers, I am not overly concerned in that it would seem suicidal for the debtors to default, especially if they ever want to borrow another cent. Your thoughts?

R.H., Ohio

I would like to thank Meredith Whitney for what she did to the bond market. First, she let us have an opportunity to buy high quality muni bond at very good price. Second, she gave a very good warning to politician. If she keeps talking, states and cities will not default. If I were you, I would write a letter to The New York Times titled, “Thank you Ms Whitney, you’re doing us a big favor. Because of you, my bonds will not default.”

L.L., Virginia

Stock brokers and “experts”  speak about the “equity premium,” the rate of return over what would be the rate of a risk-free investment, such as short-term government debt. I see figures of 3 % to 8 % quoted. They also say the best place for long-term money is in equities. What does long-term mean, and who keeps their money in one stock or mutual fund long term? Are taxes considered? Am I wrong or does a portfolio of long-term municipals paying 4% to 6 %  tax free offer less risk and the same return without making the broker rich? Is this a well-kept secret that brokerage houses do not want us to know?

J.S., Pennsylvania

I appreciate your articles on muni bankruptcies. They are very timely for me. My investment advisor (broker) is starting to recommend that I put my muni portfolio under the management of a firm specializing in the bond market. What is your advice?

B.T.

I have a lot of munis that are not associated with a municipality, such as hospitals, airports and utilities. Do these bonds have the same low default rate as “real ” munis, or are they really corporate bonds in sheep’s clothing?

C.M., Florida

In your article, you said misinformation in the market has created a number of outstanding opportunities. You should’ve said that it has done considerable damage.

L.L., Virginia

I read your response to the New York Times article on how policymakers are trying to figure out how states might be able to declare bankruptcy to relieve massive debt. The plausible case for state-level bankruptcy is more likely focused on unfunded pension liability, not current muni obligation/revenue matching capabilities. The bankruptcy poster child is General Motors. If GM were a state, would its name be General Motors?

J.S., New York