Do successful municipal bond investors need a clairvoyant?
It’s a notion that has legs – or so it seems, judging from recent online posts by some institutions.
The world of munis, the argument goes, is difficult to navigate. A bond manager – someone who continually buys and sells munis on behalf of investors and who supposedly knows and can anticipate various economic issues – gives investors an edge.
Although it sounds appealing, it’s worth a closer look, as trading munis and reliably predicting the future has never before proved to be a sound investment strategy.
Questions for municipal bond investors
In making the case for a bond manager, proponents point to a number of uncertainties in the market.
For example, last year’s tax overhaul was supposed to reduce the supply of munis. Advance refunding bonds, used as refinancing vehicles for issuers, were eliminated. Plus, issuance declined precipitously in the new year after a raft of bonds were issued before the law was passed.
What’s more, credit quality decisions were to become more challenging in light of pension issues faced by some state and local governments.
Finally, skyrocketing interest rates – supposedly the bane of muni investors – were just around the corner, we were told, making it tricky to time the market.
The right muni bond expert: You
So, does navigating these issues require investors to replace their judgment with someone else’s?
Certainly the tax law put a crimp in the supply of munis, but that might be reversed as the administration looks at ways of expanding the use of certain bonds, known as private activity bonds , to spur infrastructure investment.
As for analyzing credit quality, nothing has changed for investors: It’s always been the first step in any decision involving municipal bonds.
Guessing where interest rates are headed is futile and timing the market is a fool’s game. Besides, muni investors are interested in long-term rates – which are determined by market forces – not the headline-grabbing Fed moves that affect short-term rates.
Successfully investing in municipal bonds doesn’t require a team of managers to produce a steady stream of tax-free income.
Investors don’t need us, or anyone else, to manage their bonds. A good dose of common sense will do, and perhaps a little help from specialists who can help find quality bonds with excellent tax-equivalent returns.
We’ve never seen investors succeed in the long run by jumping in and out of the bond market. There may be times when investors must sell a bond, but the reasons should be clear and easily understood.
Otherwise, investors should hold onto their bonds, let the bonds do their job and reap the benefit of their own good judgment.