Did you have a bad spring?
A prominent business publication thinks you did.
Though we appreciate their concern, we had a lovely spring. Our interest clock kept ticking, we ignored guesses over the Fed’s next move and we weren’t panicked by fear-inducing headlines predicting the next market catastrophe.
Most important, we continued to enjoy a steady stream of uninterrupted tax-free income. And isn’t that the point of owning municipal bonds?
Lack of perspective
No one’s ever accused the media of having too much perspective. But its skewed portrayal of the municipal bond market is hardly trivial. It’s incomplete at best, deceptive at worst and can be disastrous for the average investor.
The story in question, which appeared in Barron’s, argues that munis are down in June, the third month in a row (hence its assertion that “municipal-bond investors have had a dreary spring”). It attributes the slide to uncertainty over the Fed, negative headlines and an increase in issuance.
But, the story says, things are about to turn. In fact, “It’s a great time to buy muni bonds.” Declines, after all, set up an upside. Yields are rising, and there’s room for appreciation, though investors should be careful of going out too long. There may be “interest-rate risk.”
Oh, boy.
Missing the point
On its face, the article is attractive. What was “down” is about to go “up.” Opportunity is just around the corner. For people like us – veterans of the bond business – you’d think an exhortation like that would be like manna from heaven.
But we know, as do regular investors who’ve got their eye on the ball, that the media’s reference points for munis are terribly misleading.
When you’re investing in individual bonds, talk of “the market” is irrelevant. Market “ups” and “downs” are unimportant. Income investors by definition don’t trade munis. Short-term valuations are meaningless.
Predicting if, when and by how much interest rates might move while parking funds that would otherwise generate tax-free income is folly.
Common sense hasn’t deterred similar coverage, and it likely won’t in the future. A recent article directed to financial advisers (yes, the people doling out advice) offers similarly misguided sentiments.
“Municipals should turn around this summer,” the headline in Financial Advisor says. Using the parlance of equities, the article lists the types of bonds advisors should pile into or lighten up on – “overweights” and “underweights.”
It’s about income
Hopefully, financial advisers know better. The goal is income, not capital gains. Blanket statements about “the market,” without regard to the specifics of a particular bond, are contrary to sound investing.
The key is simple: Maximize quality then yield. Longer bonds usually offer the best value and income.
There’s no need to master the yield curve or have Janet Yellen on speed dial. Ignore calls to use a “laddering” or “barbell” strategy that forces investors to forego income.
When is it really a good time to invest in municipal bonds? When you want to generate dependable tax-free income. It works in all seasons.
