Municipal Bond Forum

I agree with your philosophy as far as bond management. What is your opinion on advisors who recommend active bond management as a separately managed account to capture gains and losses. They say they get better institutional pricing, which more then makes up for the yearly fee, which is a percentage of assets.

A.C., New Jersey

It seems that every time I suggest to my broker that he consider some of your Web site information that contradicts his opinion – for example, waiting for interest rate moves and a laddering approach – he dismisses it as being information that is designed to encourage investors to put all their money in a bond program, rather than other alternatives. How do you determine what’s best for the average investor?

C.M.

If I buy a bond, can I sell it before its maturity date? Will I lose any money? If a bond has a coupon rate of 6.125% and WCY of 3.64%, how much interest will I earn?

A.B., Connecticut

I was told that you need to compare yields to worst case scenario (calls) rather than yields to maturity since bonds are priced to the worst-case scenario. Do you agree? If so, do you then suggest that I buy the highest “worst case” yield instead of the highest yield to maturity?

C.V., California

I wanted to invest my money after Greenspan spoke recently, expecting to invest at higher rates since everyone expected the Fed to raise rates. What’s going on? Why are rates not rising? The long end of the muni curve was higher yielding before Greenspan spoke. The short end of the curve is also lower yielding before Greenspan spoke. Should I continue to wait knowing that the Fed will continue to raise rates in the future? Is this rally in the market just a fluke?

C.V., California

As you state in the article ETMs and You, “The concept is simple: when buying ETM bonds, investors should be certain that all calls have been defeased or the bonds have been priced to the call date.” While that may be simple to you, it’s not that simple for individual bond investors to ascertain that an ETM bond’s calls have been defeased and the bonds have been priced to the first valid call. How many investors know where to find this information? If an ETM bond’s description doesn’t state anything, are we to assume that its calls have not been defeased and it is not priced to its first call, or are we to assume the opposite? Two simple categories in your bond descriptions would alleviate this concern for investors: “This bond’s calls have been defeased: yes or no,” and “This bond is subject to call before the ETM maturity date: yes or no under no circumstances.” With these two descriptive categories and a mandatory “yes or no,” much confusion and suspicion would be eliminated. Now it appears that the investor is subtly being told, “Let the buyer beware,” which not only alienates the investor but probably deters future investment. One municipal dealer I used to deal with actually had a category, “callable.” However, there were instances that when it said “no”, the “no” wasn’t really a “no.” There were extraordinary call provisions that would make that “no” a “yes” and the investor didn’t find out about it until it was called.

J.M., Illinois

First, I want to say that I thoroughly enjoy your columns. My question is concerning Early Redemption. As I understand it, most bonds are subject to early redemption. It seems that ER makes the yields completely unpredictable, as the bond issuer may redeem (call?) the bonds at any time regardless of the call features. Can you please comment?

M.M., Ohio