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Home > Municipal Bond Forum > Other Topics > For doomsayers, debate over long- vs. short-term bonds is probably moot

Q

My wife currently owns about $3.2 million in fairly well rated California munis. Fortunately, we bought them in late 2008, when the hedge funds were dumping good quality for liquidity, so our overall yield is about 4.8%. The bonds are well laddered from 2016 thru 2032, and we have an additional $2 million on the sidelines. As a muni-bond salesman, you must make things look better than they are. By citing the “past 30 years” in your article, you ignore the fact that we are in unchartered waters and cannot rely on the past. With the unbelievable debt being piled up by the Marxist Obama Administration and the continued printing of “funny money,” it’s only a matter of time before inflation hits big time and all bonds will be crushed. Your articles should address the real world as it is today and the dangers people face holding munis. Here in California, the municipalities, including Los Angeles and the state itself, present huge additional risks for muni holders. The unions are pushing a bill through the Legislature that will make it very difficult for municipalities to declare bankruptcy. It’s a mess out here. Any school child can calculate that a short-term bond pays less interest than a long-term bond. The point is that you are hedging against runaway interest rates and, by doing so, accepting a lower return. If you want people to believe what you write, you must step back from being a salesman and face the questions that people are asking today about munis.

A

James A. Klotz responds:

As longtime participants in the financial markets, we have heard “this time it’s different” on countless occasions. We have opined on the subject of municipal bond investment, and finance in general, since the inception of this firm. If you would like to examine our track record, our past articles and commentaries are available on our Web site,.

It is fair to point out that due to the capriciousness of the financial markets, we are never so convinced that our opinion is the only valid one that we disparage the thoughts of others. It is unfortunate that you were unable to present your opinion without attributing a malicious and self-serving motive to ours.

Yes, we sell municipal bonds. But even a cursory look at the inventory on our Web site would reveal that we sell a significant amount of short-term bonds as well as the longer-term bonds to which you object.

We have no doubt that you employed perfect timing when purchasing bonds for your wife’s portfolio. Our advice is directed at those investors who may not be as skillful.

It does occur to us, however, that if the “gloom and doom” scenario that you anticipate unfolds, widespread defaulting municipalities may not have the ability to discriminate between their long- and short-term debt.