When we formed FMSbonds, Inc. 26 years ago, we knew we’d need well-trained bond specialists, an investor-oriented trading department and a top municipal credit analyst. We never thought we’d need a professional linguist.
Last week, Alan Greenspan sent financial markets into a dither with the Fed’s new policy statement. Gone was the pledge to maintain interest rates at their current level for a “considerable period.” Instead, the Fed said it had the “intention of being patient” in removing its “policy accommodation.” For days afterward, TV economists debated the potential impact of this change in language.
To us, it is a difference without a distinction.
After the statement, stocks plummeted and Treasury bond yields spiked upward. The financial media explained this knee-jerk reaction in the bond market as “investors selling their bonds fearing higher interest rates.”
Nothing could be further from the truth or more misleading.
Short-term traders
The flurry of market activity that follows these utterances from the Fed chairman should properly be attributed to the machinations of short-term traders, not bond investors, and particularly not tax-free bond investors.
Municipal bond investors’ goals are decidedly different from those of traders. Treasury bond traders are trying to achieve short-term capital gains, while investors are seeking a long-term, dependable flow of tax-free income. Successful bond investors commit their funds to the market when investment dollars are available, rather than trying to time the market. Their long-term view prevents them from being influenced by “breaking stories” and “expert” predictions of impending interest rate hikes.
Misinformation trap
Based on investor feedback we receive, we fear that many potential muni investors have fallen into this misinformation trap over the past few years. They continue to wait for higher long-term rates before investing their funds in the bond market. Ironically, it seems the longer they wait, the more committed they are to this strategy, fearing that if rates eventually rise their bonds will decline in value.
We are well aware that there is market risk in any investment and bonds are no exception. We know from our 30-plus years in this business that sometimes over the period you own your bonds they will be worth less than you paid for them, and sometimes they will be worth more. With a long-term view, it really doesn’t matter because they continue to provide a steady stream of tax-free income, and you or your heirs will be holding them to maturity.
By the way, in the ensuing days since the Fed’s policy statement, the 30-year Treasury bond yield is again back under 5.00% and the 10-year bond is yielding approximately 4.10%. This only proves that if you missed the “newsworthy” market action last Wednesday, you didn’t miss anything.
Remember, if you are seeking capital gains, find them in the equity portion of your portfolio. When it comes to bonds, take a longer-term approach and keep your interest clock ticking.
