How important is the municipal bond market, and how much useful information does the media provide to investors? Consider this.
On a daily basis, the dollar volume of the municipal bond market is greater than the three major stock exchanges combined. There are $1.9 trillion tax-free bonds outstanding, the majority of which are owned by individual investors, either holding individual bonds or through bond funds. Moreover, the number of tax-free bondholders will grow dramatically as more baby boomers approach retirement age and younger adults seek diversity in their portfolios.
Given the size and importance of the market, one might think the media would be awash in insightful, practical guidance for investors. Unfortunately, that’s not the case.
Lots of talk, little of it relevant
Instead, we see pundits pontificating on the intricate details of the Fed’s activity and the machinations of the 10-year Treasury bond. We listen to discussions on “bonds” that fail to distinguish between the different bond markets, or that neglect to mention whether the comments are relevant to institutional or individual investors.
These are crucial omissions.
In 30 years of working with investors, we have yet to meet an individual who has owned a 10-year Treasury bond, though we’ve met many who were dumbfounded by what they heard on television and read in financial publications.
Investors vs. Economists
We would be inclined to take a live-and-let-live approach to this dearth of advice for individual investors if it were not for the fact that these media presentations are often confusing and misleading.
Why would the individual tax-free bond investor seeking income have the same focus as an economist making short-term interest rate forecasts, or a fund manager who is compelled to maintain constant market value in order to perpetuate the marketing of his fund’s shares?
Individual tax-free bond buyers don’t have these constraints. They buy long-term bonds to maximize income. They are not willing to sacrifice 40% or 50% of their income for the sake of ensuring constant market value. They don’t expect to sell their bonds.
They recognize that waiting for higher interest rates (which may or may not materialize), while accepting money market returns of less than 1%, is a costly and fruitless pursuit.
The most successful tax-free bond investors buy high-quality bonds with adequate call protection to protect their stream of steady, dependable tax-free income. By maximizing income on each purchase, they have more reinvestable cash flow available if rates should rise.
Most important, they understand that over the life a long-term bond, it will sometimes be worth more than they paid for it and sometimes less. It doesn’t really matter, since they are rarely forced to sell their bonds prior to maturity.
Divergent goals
In discussing this problem, one of our Bond Forum participants, Dr. A.B. from California, may well have come up with the best answer.
“My guess is that many financial publications would simply go out of business if ‘buy and hold’ investing were to gain substantially in popularity with individual investors,” he opines.
We agree.
If you find the media’s information or lack thereof to be confusing, talk to a tax-free bond specialist, someone who understands why you are involved in this market in the first place.