Municipal Bond Forum
With values up, is it a good time to sell?
Q
Your article, “Off the Table, or Not“, discusses whether the Obama Administration will press to limit the tax benefits of munis. Would this explain the recent rise in bond values I have seen? When does it make sense, if ever, to sell a muni before maturity to take advantage of these capital gains?
A
James A. Klotz responds:
Talk of reducing or eliminating the tax exemption hardly caused a murmur because market participants don’t believe it will be enacted into law.
The main factors behind the rise in values have been continued improvement in the fiscal condition of state and local municipalities and a general reduction in issuance due to newly implemented austerity measures.
Tax-free bonds previously were undervalued relative to other fixed-income investments, a result of the highly publicized “gloom and doom” predictions of Armageddon in the muni market at the end of 2010.
Muni bonds should be viewed differently than stocks. Bonds are bought for income, not capital gains.
There is rarely a good reason to sell bonds at a profit because the results are not beneficial. Market factors will not allow you to buy new bonds that produce as much income as you were earning on the bonds you are selling and worse, you will pay a tax on the gains, leaving you with even less proceeds to reinvest.
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