Municipal Bond Forum
With yields so high, why not a higher premium?
Q
I zig when others zag. In the past few months, I’ve purchased municipal bonds. I look, as you said, for good ratings and decent returns. I realize that with all the uncertainty in the market there will be constant ups and downs. But with interest rates dropping on tax-free munis (like 15- to 20-year bonds now paying about 3.5% to 4.5%), why aren’t the higher-interest rate munis commanding a larger premium?
A
James A. Klotz responds:
The only answer to your question is that, because of the uncertainty in the economic environment and some ill-advised guidance from financial professionals, many investors have opted for shorter maturities.
As you know, financial pundits have been warning of looming inflation and extraordinarily higher interest rates for many years. These higher rates have never materialized and, in fact, exactly the opposite has occurred, as evidenced by 10-year Treasury bonds trading at 3.06% today. Unfortunately, this has forced investors , who employ “laddered” portfolios, to re-invest maturing bonds at increasingly lower rates.
As always, we suggest our clients take advantage of this anomaly by buying the high quality, higher-interest rate bonds to which you refer.
Start here.
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