| 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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The King of Bonds on the Municipal Bond Crisis and Where to Invest Now |
The Motley Fool - June 24, 2010 - By Jennifer Schonberger
Berkshire Hathaway's (NYSE: BRK-B) Warren Buffett sounded the alarm earlier this month when he predicted a looming crisis in municipal bonds, given the poor fiscal health of many states in America. But that doesn't mean investors should steer clear of investing in all municipal bonds.
Bill Gross, founder and co-chief investment officer of Pacific Investment Management Company (PIMCO), the world's largest bond fund manager with just over $1 trillion under management as of March 31, said in an interview that there is a risk of a crisis in municipal bonds. But Gross is willing to bet the federal government will bail out the states. As such, he says investing in "munis" offers its reward for investors. We also discussed the best investments in bonds now.
Gross is to bonds what Buffett is to stocks. Dubbed the king of bonds, Gross warned about the subprime mortgage meltdown in 2005.
He manages the Total Return Fund (PTTRX) at PIMCO -- the world's largest mutual fund. In the midst of the market crash in 2008, Class A shares for individual investors of Gross' Total Return Fund yielded 4.3% for the year, which was 9% above similar funds, according to Morningstar. The fund has averaged an annualized return of 7.21% for the past 10 years, beating the benchmark by 0.84%.
Here is an edited transcript of our conversation.
Jennifer Schonberger: There are concerns that there could be a looming crisis in municipal bonds. Do you think there is indeed a crisis looming?
Bill Gross: There's fat tail potential [high risk]. That's not a way of ducking the question. It simply means that these days, based upon the foundation of other financial crises and delevering throughout the global financial system, that the states' balance sheets and their necessity to roll and to issue new debt has to be included within that context -- and to a certain extent that there are potential crises in Greece, Euroland, and elsewhere. It's hard to estimate. Ultimately, I think as [Warren] Buffett suggested, the probability of the fat tail really depends upon the willingness of the federal government to step in and to write a check.
Schonberger: Do you think the federal government has somewhat already stepped in with these Build America Bonds (BABs)?
Gross: Yeah, they've done that. The BABs are one way to assist all the technical units. So that's the private market. But the government doesn't do anything there other than a 35% subsidy, which accrues to the benefit of the non-taxable investors, like PIMCO.
The main subsidy has been through stimulus programs, and probably will continue to be -- a check in the form of Medicaid and education benefits. There's one now that's still in Congress that Obama's endorsed, a $50 billion stimulus for the states that may or may not get through. But you have a situation that's so dire that the U.S. government is ultimately the last arbiter, in terms of whether or not there's a crisis or not.
Schonberger: Buffett has said he thinks this crisis could be five to 10 years off. How far off is this potential problem in your view, and what happens that would cause this to snowball into something that really puts it at a crisis level, throws the financial markets for a loop, and perhaps hinders economic growth?
Gross: I think the crisis is more near-term than what Mr. Buffett suggests. Obviously you have states finding it difficult to raise money. For instance, the state of Illinois simply stopped paying its bills. They owe more than $5 billion to just the people that work for them and the people that collect rent, etc.; not their creditors, not their bondholders. So that's a crisis.
I think their situation is mimicked by California, New Jersey, and other large states that simply haven't addressed the need for more balanced budgets. By law, and this has been fiction, 49 of the 50 states have to have a balanced budget. But that's obviously not been the case. Our numbers show that in 2011, the deficits for all of the states in combination, you average 15% of the deficit as a percentage of the state budget. So, if that's not a crisis, I don't know what is.
Schonberger: Do you think states have become complacent about their fiscal situations, given the advent of insurance for municipal bonds, and as a result are taking on more debt than they otherwise would? Has that in a sense sort of created moral hazard?
Gross: Yeah, I think that certainly didn't help. Obviously, the insurance in the past 12 to 18 months has vanished as a support mechanism for the market, so to speak. But yeah, up to that point, investors and certainly individual investors took the word literally that they were insured -- and I guess rating agencies did too, right?
So, these-AAA insured municipalities were able to get away with very narrow spreads, very low yields, and they issued a lot of debt because it was cheap. So yes, I think that exacerbated the problem. Now, of course, that's recognized for what it was. So they're on their own from the standpoint of insurance.
Now as you mentioned, they shifted to the 35% BABs subsidy. So, in some form or fashion your point is a good one. They've been subsidized for the past 10 or 15 years in the form of their debt issuance, which has helped to put them to sleep from the standpoint of recognizing the problems down the road.
For the complete article visit The Motley Fool.
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