[caption id="attachment_437" align="alignleft" width="150"] John G. Finley, CFA[/caption]
In Part 1, we discussed the new opportunities with municipal bonds. Here will finish with some crucial considerations before investing in these bonds.
For Now, The Feds Doth Protest Too Much
While we’re not out of the woods, so to speak, the government still hasn’t imposed any new limitations on municipal bond income. That’s the relatively good news, but meddling by our Congress, a fickle mistress, could result in new limitations depending on what happens in the next session, ending February 28th. “With their terrible addiction to spending, the federal government will still be looking for revenue – even though they’ve just increased taxes on the wealthiest earners, as they define ‘wealth’,” quipped Futrell. They could agree and pass legislation that imposes taxes on municipal bond income earned by those at the 28 percent tax bracket and above.
“No matter what, municipal bonds – at this point - still beat the pants off of any other fixed income investment instrument,” says Tom Futrell.
Despite all that’s transpired and media’s fear mongering, the ML Muni Master Index shows a robust positive 52-week percent change, essentially holding its own with stocks, corporate bonds, and high-yield bonds. And, they’re right on par with Treasury performance -- actually better than treasuries at this point.
Default levels are nowhere near the doom and gloom predictions that, like a jilted lover, Meredith Whitney ominously projected back in 2010. In fact, they are actually at just 0.03 percent of the total outstanding rated municipal debt. Historically, rated muni default rates have been significantly below comparably rated corporate bond debt – a stellar track record. That said, please keep in mind, certain types of issuers have more credit risk and, depending on a number of factors, certain bond portfolios are subject to interest rate risk. For example, unrated munis have a higher default risk.
Nothing Ventured, Nothing Gained
Any investment, or any overture, implies a potential risk. When it comes to munis, you can bank on the fact that – like a courtesan in King Arthur’s court - state and local governments will always need money. While it’s certainly possible that the feds will tax municipals, the scope and implications of such an action are exponential, giving us hope for a continued respite. And why wouldn’t you want to stick with a fixed income investment security that “beats the pants off of any other similar instrument out there”?
Give us a call or send us an email if you would like to see if municipal bonds are right for you:
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Posted on Thu, February 7, 2013
by John Finley