Municipal Bond Forum
On ‘Why Waiting Won’t Work’
Q
I’m not sure you are conveying accurate information. As wealth advisors and buyers of muni bonds, we think munis have become incredibly overbought. It’s now difficult to get 3% inside of 2016/2017. A big reason behind the recent muni rally is the issuance of “Build America Bonds.” Buyers of munis that were risk adverse have come out of the woodwork to snap these up, resulting in a rise in muni bonds. The elevated prices may just be a knee-jerk reaction to the new bonds. There is also speculation that this type of issuance will catch hold. If it does, we may see many municipalities call current bonds to reissue debt with this backing. It is too early to tell, but hopefully this is not the “new normal” level of muni bonds. On the flip side, we believe this is not a good time to buy, but rather sell munis.
A
James A. Klotz responds:
Investors buy municipal bonds for a steady stream of tax-free income, not capital gains. Successful fixed-income investors commit their funds when available, rather than trying to outguess the market. In our 35 years in the bond market, we have not found that we, nor anyone else, can accurately predict the future direction of interest rates.
As you know from visiting our site, we recommend a long-term “buy and hold” strategy for tax-free bond investing. Clearly then, we would not be concerned by a so called short-term, “overbought” or “oversold” market condition.
It struck us as odd that you would be focused on market timing, since the bonds you mentioned are of such short-term duration.
Incidentally, if you are having difficulty finding yields of 3.00% inside of 2016 and 2017, as you say, you may want to consider seeking another source for municipal bonds. We invite you to review the live inventory on our Web site, where you will find yields on investment grade bonds, in these maturities, ranging from 4.50% to over 5.00%.
Curiously, after suggesting that munis will get cheaper, you correctly point out that the government’s BAB program will curtail issuance in the tax-free bond market. We are quite familiar with this program, and have participated in all of the major issues to date. We are not clear why you think this program will not continue to strengthen the market over the next two years, nor do you point out what you would recommend for high net worth, fixed-income investors. If the money market is your preference, you might want to revisit the numbers in our “Cost of Waiting” article, which you referenced in your e-mail.
As the recent market turmoil has made abundantly clear, market timing is the enemy of a sound investment strategy. It has been our experience that advisors who utilize a crystal ball are sooner or later doomed to dine on cut glass.
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