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 1-800-367-2663 or e-mail us.
I read with great interest the article in Forbes magazine about your views on investing in municipal bonds — probably because I agree with your approach 100 percent. I’ve been in this business for nearly 50 years and it has worked for me and my clients! Thanks for verbalizing this!
M.S., Arkansas
UBS is going to mark their clients’ auction-rate securities. Do you have any idea how they are going to value a security that has no bids to buy?
J.P.
I have a question re subject bonds. I know they are tax free, but do you have to show income to the IRS when you file your returns?
P.S., New Jersey
I’m sure your read the recent Dow Jones article that suggests we are overpaying for insured munis and may actually get a higher yield, with no more risk, on A or better-rated paper that is not insured. The article also advises muni buyers to focus on the underlying rating of an insured bond and avoid them if they are not A rated or better. Most bond brokers never mention the underlying rating unless asked and emphasize that the AAA rating of an insured bond is mostly what matters. How do you feel about this in light of the recent events in the bond insurer arena?
S.F., Connecticut
In your article, you mention that rated bonds are relatively safe. My question is, why would FMSbonds choose to underwrite projects in which the bonds were unrated, such as the Anthem Park issue? Can a buyer of such a bond obtain insurance on his own to get some “peace of mind?
J.R.
It appears to me that the rating agencies are quite fickle since S&P has made a 180-degree turn and put ACA on negative credit watch with the possibility of a downgrade. ACA just had over a $1 billion write down. In the event of a downgrade below A, it is my understanding that they would have to come up with more than $1 billion in cash. Looking at the stock performance, it is my view that the investing public did not have a great deal of confidence in S&P’s rating view. After all, these are the same rating agencies that rated many Collateralized Debt Obligation (CDO) tranches AAA and have downgraded them several times in a relatively short period of time. Since the issuer pays the rating agency a fee, an inherent conflict of interest seems to exist. Congress and the regulators are just now starting to review this situation, since the public’s confidence in these rating agencies has waned. Beyond quoting S&P’s analysis, what is your internal analyst’s independent view on ACA and what remedies does ACA have now?
B.P., New Jersey
My wife and I have $2 million invested in various forms of fixed income. What do you think of step-up CDs and corporate notes? We are looking at Toyota with a term of 20 years. The rate of 8.56% is guaranteed for the first year. Our goal is to realize as much income as possible while alive and protect the principle that will be left to our heirs when we die. The survivor option is a plus. A major risk that I see is a negative yield curve. Is there something additional that should be considered?
J.C.
If I buy $1 million worth of a tax-free bond fund shares (say, 133,333.33 shares at $15.00 per share) that is paying a monthly dividend of 5% ($4,166), and next month the NAV drops to $14.50 per share, will I continue to receive dividends of 5% of $1 million ($50,000)? What happens if the NAV increases to $15.50 per share? Can I sell the NAV profit and continue to receive the original 5% of $1 million, the original purchase price?
P.S.
If Fitch downgrades the bond insurers, how can there not be a large selloff of insured municipals? How do you expect the muni market to react to the bond insurers being downgraded?
C.
When I look for munis maturing in four or five years, the yield to maturity these days for AA or better is around 3.4% to 3.5%. However, I frequently see a YTM of 3.6% to 3.7%, where the only apparent difference from the surrounding bonds is that the higher yielding bond is actually a longer term bond that is pre-refunded (sometimes to 101 or 102, for example) to the earlier date four or five years from now. There are plenty of examples of this. Why should the market assign a higher yield to a pre-refunded bond with exactly the same rating as the bonds around it? I buy these pre-refunds all the time, but have never understood why they are the bargains they appear to be. Am I missing something?
D.M.
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