Municipal Bond Forum

I am retired and 75 years old. I rely on a large portfolio of municipal bonds and income from my deferred income accounts to maintain my style of living. I hold the bonds to maturity or call and never pay attention to price fluctuations. I buy only high-grade bonds, 100 bonds at a time, (Aa1 or AA+ or better) and only pay attention to coupons that will maintain my income. I buy bonds where the yield-to-call is close to yield on new issues due on the call date. This always means premium bonds. I now find that to get coupons of 4% or 5%, I pay a higher premium price. Since these bonds mature in 15 to 25 years, and I have older bonds with higher coupons, and I have cash equivalents and constant withdrawals from my IRAs, I have no difficulty maintaining the desired income level with minimal change in my net worth. I would be much interested in your opinion of this strategy. Following your lead I avoid laddering.

R.Z., Florida

Given the past scandals involving brokerage houses and their former star analysts who were found not to have the best interests of investors at heart, how confident are you that the municipal bond insurance companies are themselves completely above board, and when the inevitable financial debacle hits the muni bond investor, that these insurance companies won’t rely on the SODDIT defense (some other dude did it)? Put another way, who is watching those who insure the municipal bond investor against default and how can an investor be confident in the financial stability of these companies?

L.C., New York

You received an e-mail from “P.W.” on 2/9/05 regarding the need to report a maturing tax- free zero coupon bond to the IRS. The 1040 schedule in which capital gains are reported asks for purchase and selling prices of a security. How should the tax filer make clear that the bond was a tax-free muni zero and, therefore, no tax is due even though there was a difference between the purchase and selling prices? Also, in your response to P.W., you stated, “Based on the original cost, munis can be subject to capital gains.” Can a tax-free zero muni be subject to capital gains? If so, how would this be calculated?

J.F.

Assuming an unrated municipal bond has the equivalent credit quality of, say a BBB rated municipal bond, what is the typical or average increase in basis points for being unrated, also assuming same maturity?

P.K. Colorado

I thought you might be interested in a Bloomberg article, “U.S. Bond Forecasters, Wrong on Yields in 2004, Blow It Again.” The best thing about this article is that these guys take no responsibility for their bad calls. They say that they will be proven right. Most of them have called for higher rates since Oct. 31, 2001, by telling people to stay short. They have cost investors billions of dollars. They just don’t get it.

B.N., West Virginia

At the start of Greenspan’s interest rate hikes, when the masses were calling for higher interest rates on bond yields, you were right when you stated that you would not be surprised if yields peaked. Now that it seems that the masses are lowering their yield expectations, I’m curious to know whether you think we might see higher rates again.

A.C., New Jersey

I was very pleased to stumble across your Web site and find a firm that supports my investment strategy. I therefore trust your answers to some questions that I have (and believe me, that says a lot). My family has invested in municipal bonds for generations and I have followed suit. I am currently managing my portfolio exactly as my father and grandfather do, but I have some questions that I would like you to answer because their answers are simply that it’s “the way we’ve always done it.”

First, I only buy long-term premium munis for the highest Yield to Call/Yield to Maturity that I can find, exactly as you suggest. I normally wait for the interest to build to a certain amount before I buy another bond. I do this because I can get a better price by buying a bigger chunk of bonds. It takes a few months to get to this point, and I sit on the cash in the meantime. (It’s actually in a type of money-market account.) If I don’t need all of the income to live off of, how would you suggest investing it until I have enough to buy another bond?

Second, I currently live in Washington, D.C., where my munis from all over the country are triple exempt. If I decide to move to New York for a few years with the intention of returning to D.C., what would you recommend doing? I obviously don’t want to liquidate my holdings and reinvest them in N.Y. bonds because, for one, I would get hosed on the bid/ask spread. Should I just weather the few years and pay the state and local tax? Third and finally, when a muni is pre-refunded, do you recommend selling it?

T.B., Washington, D.C.

I am in a bit of a quandary. I am attempting to find specific information on CABs (Capital Appreciation Bonds), such as how they work exactly and the relation to a refinanced structured loans. If you could provide any reference material or point me in the right direction I would greatly appreciate it.

J.A., New York