The spotlight is on municipal bonds, have you noticed?
With an up-and-down equities market and stinging tax rates, many reporters and pundits are touting the “buoyancy” of the “once-sedate” muni market.
Despite problems in such places as Chicago, Detroit and Puerto Rico, they note, investors are plowing funds into tax-free bonds.
Along with this enthusiasm for munis, however, are long-held canards that invariably accompany reporting on a market the media generally doesn’t follow and often misunderstands.
Strong demand for munis
They report, correctly, the strong demand for munis. A recent report noted 27 consecutive weeks of inflows into municipal bond funds.
Further, since the beginning of March, munis have risen about 2% compared with Treasuries, which have been virtually flat, according to another story.
While more than $73 billon has been pulled out of taxable bond funds in the past year, the AP said, investors poured about $16.5 billion in muni bond funds.
These are all solid facts. However, the water gets murkier when the reporting delves into the how-to of muni investing.
For example, despite decades-long low interest rates, we’re again warned of the perils of investing in long-term bonds. After all, rates “are expected to rise.”
As we’ve noted (“Muni Investors Looking for a Sign Just Got Another”), the Fed isn’t keen on raising rates.
And stories never mention the tax-free income investors would forego – and never recoup – while they wait for rates to rise.
When exactly will they rise, and by how much? We’re left hanging. It’s with this shaky premise that we are advised to give up the more lucrative rates offered by long-term bonds.
A muni bond ‘manager’?
Other reports refer to hiring a “pro” for your bonds.
As clients and friends know, we’re a strong believer in the power and knowledge of the individual investor.
No one needs a bond “manager,” just a little common sense.
Look for quality first, then yield. Should the need arise, talk with a specialist, someone whose sole focus is tax-free municipal bonds.
With tax rates approaching 50% in some states for the highest earners, and the advantages of a steady stream of tax-free income, municipal bonds are practically a no brainer.
Even investors from foreign countries, who can’t enjoy the tax-free advantages of munis, are piling into the market. Facing negative interest rates at home, they’re attracted to the higher yields.
Just remember, with the increased attention there also comes some dubious advice and an important omission: hesitance is costly. Investors reluctant to jump in today will look back wistfully at today’s rates.
