Munis’ Looking-Glass Moment

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

During the Great Recession, futurists struck fear among some municipal bond investors by warning of dire financial obligations facing state and local governments.

Now, in what surely seems like a through-the-looking-glass moment, some analysts fear local governments are actually under borrowing.

My, what a decade has wrought.

Why investors were cowed during the Great Recession

Back in 2008, most municipal bond investors shared our analysis of the muni market gyrations and profited handsomely (“A Tale of Two Investors,” “Muni Market: Heal Thyself”). Others, unfortunately, were cowed by headline hysteria.

They fled to the sidelines and parked their cash in money-market funds, where it stagnated.

What these investors missed, of course, was the fact that muni prices were driven down by the particular pressures facing large institutions at the time, not the health of the bonds themselves.

What’s more, state and local governments aren’t powerless to manage their finances.

They had an array of tools at their disposal – and they used them.

In fact, today, states owe $143 billion less than they did in 2010, according to Bloomberg.

Despite a crying need to address acute infrastructure needs, many local governments are reticent to take on debt.

They’re putting off much-needed public works projects while forgoing attractive low interest rates. This anti-debt sentiment cuts across a host of states and political parties.

An especially bad time to time the market

Meantime, investors who stowed their cash waiting for the ideal moment to jump back into the market have instead seen yields plummet, missing tax-free income they’ll never recoup.

And they’re unlikely to find relief.

The Fed’s not on their side; it’s contemplating a rate cut. A gusher of new issues? That’s hardly expected. Slackened investor interest? Demand is actually increasing as after-tax muni yields are still more attractive than other fixed-income investments.

Mantra for success

In the wake of the Great Recession, there were still countless commentators who said profligate borrowing and pension obligations would bury the municipal bond market.

For those who followed the widespread hyperbole, it’s been a decade of misery.

While there are certainly still risks in the bond market, as there are in all investments, successful municipal bond investors have one thing in common: they keep their interest clock ticking. It’s a simple strategy and works regardless of the economic climate. Since no one can accurately predict the future, they don’t try.

James A. Klotz is the President of FMSbonds, Inc.
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Jun 26, 2019

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