| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Water Bonds May Be the Secret to Preserving Capital |
Commentary by Joe Mysak
May 19 (Bloomberg) -- Investors wary of municipalities’ dependence on declining taxes should consider water and sewer revenue bonds. It’s a rare water bill that goes unpaid.
That’s the advice of one bond investor who says that faltering tax collections and rising pension costs are diminishing municipal bonds’ allure.
There is plenty for muni investors to be concerned about: Housing bonds may be crushed by bad mortgages, hospital issues by the new health-care bill, airport securities by airline bankruptcies. The same investors who say that the end of municipal securities is upon us also complain that yields are too low to justify the risk.
“A scared seller is my best trading partner,” said John Wilen of Frisco, Texas, in an e-mail last week. Wilen is an individual investor with a special interest in munis. I first wrote about him back in 2002.
Investors like Wilen hold more municipal bonds than any other group, $997.8 billion of the $2.8 trillion outstanding in 2009, according to the Federal Reserve’s Flow of Funds Report. If individual investors lose their faith in the market, it might translate into higher borrowing costs for states and localities.
“People let ‘big picture’ economic trends and theories paralyze them,” Wilen wrote. “So they wallow in checking accounts earning 0.1 percent.”
Seeks Income
Wilen spends a part of each day looking for the best yield on bonds that meet his specifications. He’s not concerned about timing his purchase, or about whether he is buying at the top or bottom of the interest rate cycle. At age 50, he is retired, and interested in tax-free income.
“When someone dumps a high-quality muni, I am there to scoop it up,” he wrote. “Having real-time trade history through the Municipal Securities Rulemaking Board now makes this possible.”
To those investors who fear committing to an investment that may lock them in for as long as 30 years, Wilen said, “Even the longest-dated munis rarely make it to maturity. They get called, they get tax-swapped, they get sold for big gains, they get pre-refunded, sinking funds claim them. The problem isn’t getting stuck with a 30-year muni, but holding onto it.”
So what’s he buying now? Water and sewer revenue bonds, because “everyone pays their water bill.” The water bonds he has been buying are from medium to large cities, and from water agencies that serve multiple communities. With enough looking, you can still find 5 percent yields, he wrote.
Reduce Holdings
Wilen also likes bonds from universities that have large endowments. “It’s a big plus if they have room to raise tuition,” he wrote.
Wilen, who now owns more than $10 million in munis, said he expects tax-exempt yields to stay low for some time. That’s because taxable Build America Bonds, which are subsidized by the federal government, are taking up a larger proportion of the municipal market. Rising tax rates can only make the tax- exemption more valuable.
Not all investors are as sanguine as Wilen. The rutted washboard Route 1A approach to Boston’s Sumner Tunnel shook Bart Higgins’s confidence in munis.
Driving a little too fast on the highway leading to the tolls outside the tunnel cost the 61-year-old retired software engineer his dashboard lights back in March. Another rattling run over the same road a couple of days later restored them.
He chuckled about it, he said in an e-mail, until he and his wife, Charlene, were watching the 1973 Robert Mitchum movie, “The Friends of Eddie Coyle,” which was shot in and around Boston. The approach to the Sumner Tunnel was nice and smooth in the movie, he noticed. He then asked his wife, “Do you think it’s time to lower our exposure to munis?”
They sold $360,000 of the $760,000 in municipal bonds that were “the foundation stone” of their retirement investments.
Deferred Maintenance
“All the focus in the muni discussion has been on unfunded pension liabilities and I can’t understand why the implicit but nevertheless real -- and very unfunded! -- infrastructure liabilities rarely figure in,” Higgins wrote.
Every pothole and crack in the roadway, wrote Higgins, represents a government decision to tax someone in the future “or hand them an otherwise almost unusable infrastructure.” The damage grows from superficial to systemic and, finally, to unusable and to replacement at a much higher cost.
Higgins doesn’t see a wave of defaults.
“It’s just that, past a certain point, one becomes uncomfortable with one’s asset allocation,” he wrote.
Who do you side with in this tale of two investors?
--Editors: James Greiff, Steve Gittelson
Click on the “Send Comment” in the sidebar display to send a letter to the editor.
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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