Municipal Bond Forum

We are holding some Buckeye tobacco bonds and I would like to know what would happen if contributions to the Master Settlement Agreement seriously decline. I have read that the likeliest scenario would be the extension of maturity, which would be fine. But what are the other possibilities? I assume that defaults do not just happen overnight, or do they? My wife and I have been working with Saul Rosen for a couple of years now and we think he and your firm is top of the ladder. We appreciate the straightforward business practices and no-nonsense advice.

P.H., Oregon

We are retired, have zero tolerance for risk and are looking into bonds. Right now, we’re earning 5.6% interest on our CDs and they are expiring. Of course rates are way lower now. I saw your ad in our newspaper for the North Texas Tollway muni bond at 6.04%. Sounds too good to be true, which worries me. Who rated this bond? Is it insured? What does it mean that it’s non AMT? It’s selling for 99.5, which, I think means it’s selling at a discount and is better for me, right? Is the 6.04% interest rate a fixed rate? Is interest paid semi annually? Do you charge a fee? For example if I bought $50,000 in this bond, what is my cost and interest mailed to me? If I decided to sell this back to you in a few years, what is your fee for that? Is this bond super low risk?

J.K.

In reviewing the recent financial statements for some of the tobacco bonds that I hold, it appears that tobacco revenues pursuant to the Master Settlement Agreement are declining as a result of declining tobacco sales in the United States and, in some cases, the revenues are even less than the expenses. What is your outlook for tobacco bonds?

J.M Florida

One-year CDs pay just 1%. The other day, I was offered a 5% well-rated muni at par. That’s a great return, but it’s so different from what’s being offered at banks, that I’m scared because it’s too good and everything else is like in a different world of interest return. I have always believed that high return equals greater risk.

J.S., New Jersey

In your article, you made a statement concerning the default on nine separate bonds that didn’t have an S&P rating. The problem with that statement is that by the time the bond defaults, S&P has already withdrawn its rating generally due to non-compliance by the issuer with financial reporting requirements. Therefore, in the current market, a bond that did have a “AAA” rating can now not be rated due to the insurer’s default and financial problems with the issuer. To say that the nine defaults were not even rated by the S&P isn’t as meaningful as a statement that the nine defaulting bonds were never rated.

S.M., California

With all the volatility I hear about right now in the bond market (I assume this is the entire bond market, not just U.S. treasury bonds) there is a huge uproar when it comes to selling at the high, since interest rates are going to fly. Let me know your thoughts on this.

T.G Connecticut

I recently read about “serious” proposals to remove the federal tax-free character of municipal bonds starting after 2011 and grandfathered to all munis issued before then. I know these kinds of proposals have been floating around forever, but this time it seems to have garnered much more support in Congress, mostly due to the dire budget situation of most states and localities, and also due to the recent success of Build America Bonds. If such a proposal were to pass, it would undoubtedly have disastrous  consequences.

A.B., Nevada

I would like to see a substantive forum discussion on the possibility of states and municipalities issuing new debt under taxable status.

V.A., Nevada

You are correct in your assessment of muni bond laddering, but you failed to mention that if you buy one 30-year bond every year, you have effectively created a ladder, or an average life of no more than 15 years, which is now equivalent to holding medium-term bonds, while enjoying higher yields than otherwise. The key is to get started and don’t stop.

J.A., New York

I just read your article on laddering and chuckled. I started investing in individual long-term muni bonds in 1988. I was advised to sell all of my long bonds and reinvest in short terms. I was also advised to ladder. But as your article brought out, I noticed that after 2000, rates were not increasing, so I continued buying when my income presented a surplus and when a bond was called. I now have many bonds paying a higher rate and yield because they were longer term.  Your advice is good. Just buy when you have the extra cash, invest the longest term for your lifetime (or heirs) and buy good quality bonds.

S.A., California