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Q

I appreciate your article. Because I own several businesses and am in a high tax bracket, I’ve looked at munis. I’m not a speculator, so I didn’t leap at opportunities when MBIA and Ambac were downgraded. I, too, foresee a rise in taxes and see no bounce in interest rates as in the era of “stagflation.” I think the “wage” component of the “wage-price spiral” has been wiped out. I am looking at a three- to five-year investment horizon. As an investor in Treasuries, what do I do? I’m losing principal to inflation.

A

James A. Klotz responds:

We agree with your points, but not your conclusion. You foresee a rise in taxes and lower returns on munis. This means that you agree with us that bond prices will be moving higher.

You believe interest rates will not “bounce” and there will be no “stagflation,” as we saw in the 1970’s. Once again, if you are right, this will also support bond prices.

You think wages will not be increasing, which will keep “cost push” inflation at bay.

You further suggest that Treasury bonds at 3% are a low-return investment (in fact, in your tax bracket they are providing negative real returns after taxes and inflation).

Actually, you could not have made a better argument for buying longer-term tax-free bonds.

Although every investment has risk, buying high-quality municipal bonds, which enjoy an historical default rate under 1%, cannot be considered speculative. We think buying well-secured municipal bonds providing taxable equivalent returns of up to 9% is the way to go, at least with a portion of your portfolio. As an investor, it doesn’t do you much good to be “correct” if it doesn’t put any money in your pocket.