Municipal Bond Forum

I have a large portfolio of California municipal bonds with an average yield of about 5.20% and eight to nine years in duration. In the current interest rate environment, what maturity dates and quality would you recommend for additional purchases? I would like to obtain yields of close to 5.00%, but I’m concerned about buying long maturity issues if interest rates rise. Also, you talk about “longer-term” bonds. Are you referring to 30-year bonds only or 20 to 30, etc.?

L.C., California

I’m a long-term individual bond investor with a goal of getting a minimum of 5%. California bonds are selling at a very high premium right now. I’m sitting on some cash and wondering what next year might bring in terms of rates and prices.

E.G., California

I like your articles, but stocking up on long-term bonds and paying par plus a premium to get maybe 5% yield with investment grade ratings is setting yourself up for a big loss of principal when interest rates increase, and they certainly will at some point over the next 20 years. You also assume that the issuer will remain solvent over the entire 20 years. I’m a fixed-income guy, but it’s tough these days to rationalize all these variables and go out 20 years or more.

J.G., Florida

Suze Orman (“Suze Orman, James Tisch on Common Ground“) didn’t address the concern that if interest rates go up, a purchaser may regret not waiting to get the higher rate. It may be that it’s still better than the 1% taxable at an FDIC-insured institution, and that a bond purchaser can always hold back some funds and ladder. And, of course, there is no perfectly safe, highest rate guaranteed investment. Bonds are a good part of a balanced portfolio, but Suze’s assessment is very limited.

V.L., Florida

In your article, “Clouds Darkening for Tobacco Bonds,” you don’t mention the status of tobacco bonds that are insured. I have California tobacco bonds insured by BHAC. Should I be concerned?

R.G., Texas

I imagine Chicago’s plan to increase cigarette taxes, which you discussed in your article, “Clouds Darkening for Tobacco Bonds,” will cause problems for Illinois tobacco bonds. I purchased Erie, New York, tobacco bonds, rated BBB/BBB+, first tranche taxable. The maturity date is 2028 but they pay faster as all principal reductions for the bond issue go to the first tranche. Are you concerned about these types of bonds?

S.Y., Maryland

I need a means of measuring the likelihood of problems with Puerto Rico bonds. A power and light company generally sounds OK as long as consumers can pay their bills. But would hard times in Puerto Rico be that much different than hard times here in the states?

R.S., New Jersey

Everybody is dumping Puerto Rico bonds because 13.5% unemployment is so high. Thus, people are moving out of Puerto Rico and it is declining in population. Don’t you think this could be dangerous for investors?

L.B., California

We nearly had a default of U.S. obligations because of the choices made by representatives of several states. Given their willingness to allow a U.S. default, is there a default risk premium built into state and local bonds?

I.P.