Suffering from sticker shock in a lower-interest rate environment? The pros aren’t. They’re jumping in with both feet.
As of June 30, banks across the country increased their municipal bond holdings to $330 billion. That’s a $20 billion increase over the previous 12 months and the biggest jump in 27 years.
The number of banks loading up on muni debt runs the gamut.
JPMorgan increased its muni holdings to $37.5 billion as of June 30, a $14.7 billion increase from 2010. Wells Fargo held more than twice as much municipal debt during the same time period, from $18 billion two years ago to about $40 billion at the end of June, while PNC’s muni holdings also more than doubled over that time.
The reasons for their enthusiasm? Tougher regulations compel them to increasingly look for safer investments. They’re protecting profit margins against declining interest rates, while liquid investments give them more flexibility. Better still, municipal bonds are providing outstanding returns.
According to second-quarter government filings culled by The Wall Street Journal, Wells Fargo’s muni holdings had an average yield of 4.39%, which compares favorably to its $1.5 billion of Treasuries, yielding an average of 1.6%, and its $137.5 billion mortgage-backed securities, that returned approximately 4.32%. And those numbers don’t reflect the added advantage of munis: they’re tax exempt.
Holding off? Until when?
Unfortunately, in the current interest-rate environment, some individual investors are reluctant to pull the trigger, choosing instead to remain on the sidelines
An 81-year-old retired physician told the Journal he’s holding off until rates rise. But he didn’t say how long he’d wait; Fed Chairman Ben Bernanke thinks he’ll be waiting for quite a while.
Holding cash, or parking it in a money-market fund that pays virtually nothing, can be expensive. We refer to this phenomenon as the cost of waiting (“Time Flew But Interest Rates Didn’t”) and have written about it extensively.
Fact is, tax-free bonds continue to make as much sense for individual investors as they do for institutions. Taxes are expected to rise regardless of who wins in the November elections, and despite some notable though rare exceptions, credit quality is generally improving. Further, as Europe’s debt crisis continues to unfold, munis are regarded as a safe haven.
Today, long term, high-quality munis can be purchased to yield 3.75%, a return comparable to 5.75% for investors in the 35% tax bracket.
As always, when investing in municipal bonds, look for quality and maximize value. Waiting, though, can be expensive.
