Municipal Bond Forum

Tobacco consumption

Mar 17, 2006

Cigarette sales have dropped, and because industry payments to states are based to some extent on the number of cigarettes sold, the states’ settlement revenue has dropped. States that were part of the settlement initially expected about $6.5 billion this spring, for instance, but the tobacco companies have said that they may be entitled to cut their payments by as much as $1.2 billion this year. Some of that decline would be the result of dropping sales, and some could come from other adjustments allowed under the settlement. Since state obligations under the tobacco bonds is limited to settlement proceeds paid by the tobacco companies, how would declining receipts impact the credit worthiness of tobacco bonds?

J.S., Washington, D.C.

More on “A Forward Strategy for the Inverted Yield Curve”

Mar 17, 2006

As a client of yours, and a reader of your bond forums, which I really enjoy, I had some thoughts on your article. What you wrote makes sense, but what would be the problem with buying a 10-month or one-year CD, which is paying close to a 5% yield, and after the maturity of the CD, investigate yields of long-term munis. Can long-term muni bonds go any lower? I don’t think so. At some point the yields would have to rise. Does this make sense?

D.P, Florida

More on “A Forward Strategy for the Inverted Yield Curve” cont’d #2

Mar 17, 2006

Long-term rates can always go lower, but can’t they also go higher? Are all the sophisticated investors on the buy side of long bonds and all the dummies on the sell side? And if all the smart people are buying long bonds, does that mean it’s the right thing to do? Last year Berkshire Hathaway lost $1 billion on its bet on the dollar. Can we really be comfortable with the thought that the probability of rates going to 2% is greater than them going back to 15% plus, like they were under Reagan? Threats from abroad have a financial and economic effect that the Fed and other institutions can’t necessarily control and we, as a country, are doing everything that increases the threats facing us from abroad. Doesn’t being long in bonds tend to increase these risks beyond what is appropriate for most muni investors who are in them for the safety and security of their principal?

S.F., Connecticut

On “A Forward Strategy for the Inverted Yield Curve”

Mar 7, 2006

To what extent are foreign purchases of longer-term treasury securities responsible for the present slope of the curve?

On “A Forward Strategy for the Inverted Yield Curve” – cont’d #2

Mar 7, 2006

So you’re saying, don’t keep your eggs in one basket? If I can get a higher yield short term with a portion of my portfolio, and swing the higher yield earned into the long terms (before they’re bought out), that would be the best, right? Thanks for your thoughts. Your article was short, precise and good for average investor like me!

S.P., New Jersey

ERP call feature

Mar 6, 2006

I understand that certain bonds, particularly facility revenue bonds (i.e., hospital or housing bonds), often will carry an ERP (Extraordinary Redemption Put) call feature to cover a cataclysmic event to the facility whereby the bonds could be called, typically at par. In the case of an escrowed bond whose underlying facility has such an event and their bonds are called, would the escrowed bonds also be called? Assume that the bond has been properly defeased and now has Treasuries supporting the payments and redemption. Could, or why would, the bond be called? It is no longer dependent on the revenue stream of the facility.

J.M., Michigan

It’s the law

Feb 15, 2006

After following your Web site and recommendations for several years, I decided to purchase some bonds from you. When I went to open an account, the very first question I was asked was my social security number and date of birth. If I opened an account, I would expect to give you my social security number, but my birth date is none of your business, except to assure that I am a legal adult. Consequently, I have given up the idea of switching brokers. You might want to rethink your policies.

Why go long now?

Feb 10, 2006

With the inverted Treasury yield curve and the muni bond curve being visibly flat, do you still advise investors to buy long muni bonds? Why would one want to risk buying long-term bonds when there is no reward to extend out in the curve? What do you think about investing 80% of one’s portfolio in short term bonds and 20% in equities?

M.V., California

‘Discounted’ fund

Feb 10, 2006

I recently purchased several closed-end muni funds at a 12% to 15% discount to NAV. On average, the funds all contain at least 75% AAA bonds. How does one compare this fund “discount” to owning individual bonds?

M.S., Florida

Tax-free income and the EIC

Feb 6, 2006

We have a client who has a tax-free bond, therefore the dividends are not reported on his tax return. However, he qualifies for the Earned Income Credit and the amount of dividends would put him over the threshold. Does he still not have to report the dividends in this case?

D.C., Virginia

1-800-367-2663

1-800-367-2663

Tobacco consumption

More on “A Forward Strategy for the Inverted Yield Curve”

More on “A Forward Strategy for the Inverted Yield Curve” cont’d #2

On “A Forward Strategy for the Inverted Yield Curve”

On “A Forward Strategy for the Inverted Yield Curve” – cont’d #2

ERP call feature

It’s the law

Why go long now?

‘Discounted’ fund

Tax-free income and the EIC

Start here.