Muni Investors, if Not Soothsayers, Had a Good Year

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<h3>James A. Klotz</h3>

James A. Klotz

If you were trying to outguess the municipal bond market in 2022, you probably had a bad year.

Investors who relish tax-free income, on the other hand, profited handsomely.

Those are the takeaways we’ve noted as commentators offer mea culpas for predictions they made last year and submit their outlooks for 2023.

Bond market guessing is unnecessary

Crystal balls are notoriously unreliable in the long term, which is why we decline to employ them. No one can accurately predict what, how and when events will impact the bond markets, and it doesn’t pay to try.

Consider the plight of those trying to outguess the Federal Reserve Board, an especially popular exercise among municipal market seers.

Back in December 2008, amid the Great Recession, the Fed reduced the overnight lending rate to effectively zero, where it stood for seven years.

Muni investors if not soothsayers had a good year

Thereafter, rates ticked up until the pandemic hit. In April 2020, the Fed again trimmed the rate to effectively zero, where it stood for about two more years.

Then inflation took off. In response, beginning last March, the Fed raised rates seven consecutive times and has signaled it will do so again at its next meeting in February.

During this time, commentators were flush with prognostications, though none, as far as we can tell, accurately foresaw these events. Nevertheless, they weren’t dissuaded from trying.

Reading the Fed tea leaves has always garnered headlines. Of course, it’s impossible. Worse, the fed funds rate is poorly understood by many investors and those following such forecasts usually miss out, as we’ve discussed (“Don’t Be Fooled by the Fed”).

Muni investors keep it simple

In addition to misfiring on their Fed projections, pundits also failed to mention how the massive outflows from muni bond funds that began early last year resulted in extraordinary yields for buyers of individual bonds (“When Sellers Present Buyers With a Muni Opportunity”).

Instead, they focused on the selling tsunami, and didn’t discuss until recently, the value available to investors.

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    The most salient takeaways we gleaned from 2022 simply reinforced what we learned about the market decades ago: Allow municipal bonds to do their job – generate a steady stream of tax-free income.

    Invest when funds are available and focus on quality. When unique opportunities arise, take advantage of them.

    It’s simple, you don’t need to be a clairvoyant and you can be assured we’ll have a similar outlook next year.

    James A. Klotz is the President of FMSbonds, Inc.
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    Jan 11, 2023

    Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.