Municipal Bond Forum

I appreciated your article on laddering. I agree that predicting future rates is futile and that ladder strategies are not necessarily wise — if you want to make money. I notice you didn’t mention the importance of slope in determining what maturities you should buy. Given enough incentive, or slope, a buy-long-and-hold strategy is brilliant for the tax-free investor. In a flat yield curve environment (I have no idea the last time the muni curve was any degree of flat), I still wouldn’t favor a ladder strategy, but I don’t think I would buy long and hold, either.

D.W.

I enjoyed your article on public pensions. My wife and I receive three public employee pensions from Illinois. Needless to say, the hype Illinois has received in this regard has been on my mind recently. As usual, you have given us a thoughtful and balanced presentation to consider against the popular press, which often runs to hysteria. As an FMSbonds client, I appreciate the service you perform by offering us informed commentary, and the insight it shows gives me confidence in the research underlying the recommendations we receive from our broker, Edie Nasello.

G.B., Montana

As a client of FMSbonds and active muni bond investor, I read your article about laddering with interest but felt that it raised some unanswered questions. First, isn’t your critique of laddering really a product of a steep yield curve? Would your criticism of laddering soften if the yield curve flattened out so that short-term bonds yielded substantially more in relation to long-term bonds than they currently do? Secondly, in the current market, would you be as critical of laddering, which encompasses maturities from, say, 10 to 30 years as opposed to holding a portfolio of all 30-year plus bonds?

M.G., New York

In your article on laddering, you forgot one important point: 30 years is a long time. If the holder of the bonds needs the money before maturity and has to liquidate these bonds, they will suffer losses. Interest rates have nowhere to go but up. If an investor is 55 and buys 30-year bonds now, it is a disaster waiting to happen. Also, if you believe this theory, why do you offer shorter-term bonds?

M.S., California

In your article on laddering, you don’t address the situation where the investor uses the income each year and perhaps some of the principal, especially in a rising interest rate environment. Surely you don’t believe long- term interest rates will not be in a significant uptrend the next 10 years.

A.B., Florida

Regarding your laddering article, you presumably don’t have a problem with “chasing yield,” assuming good credit quality. If the concern is quick Fed tightening, would you still go long now?

H.B. Massachusetts

You missed the whole point of laddering. For retirees, it gives you the cash reserve to cover emergencies if there should be any. If there are no emergencies or you don’t need the cash, you can reinvest it. Retirees live on bond interest and do not accumulate interest to cover emergencies.

H.W. Texas

I completely agree with your advice and value your editorials. The only caveat I would add is that I like to purchase what I call a “long-term bond ladder.” I only buy bonds delivering the most interest (generally 20 to 30 years) but with various maturity/call features. This has served me well as I have been averaging 5% returns over the last 18 years and still get “interest rate protection.”

D.M., New Jersey

Excellent facts on laddering. I will never need the principle of my portfolio and have more than $1 million in long-term tax-free bonds. May I suggest you touch on margin buying in the future.

L.V., California

I disagree with your points concerning the drawbacks of ladders. You’re not accounting for credit risk, for which you’re not well compensated for going out longer. In a ladder structure, being able to keep buying 10-year bonds is, in effect, a free lunch. The ladder gives you more access to your cash to meet cash-flow needs. Long bonds are callable and are not efficient investments, and they can be called at the worst time for the investor. Going long term only works in combination with a mostly equity portfolio, say, 70 percent or more.

A.S.