| 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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A Fresh Look At Muni Bonds |
Forbes.com - Oct 15, 2009 - by Tom Dalpiaz
It might be large, complex and maybe a little scary, but it's a fresh look. Here's why.
Here's a story I remember hearing very early in my municipal bond career, over 27 years ago:
One day, an energetic young broker, new to the investment business, decided that municipal bonds were quite attractive and would be a perfect investment for one of his prospects. The broker dialed his prospect and said, "I've got some attractive municipal bonds that would be just right for you." The prospect replied quickly, "Well, I don't know. Don't municipal bonds deal with local governments, water and sewer systems, roads and bridges and such? That's not very exciting stuff. How can they be much of an investment? Thanks anyway, but I don't want any of those."
The broker contemplated for a few days his prospect's decided lack of interest in an investment suggestion he knew was well-suited. The broker decided to try a different approach. He called the same prospect again and said, "I've got some attractive tax-exempt bonds that would be just right for you." His prospect replied, "Tax-exempt bonds? You mean the bonds where I don't have to pay taxes on the interest income I get? Now you're talking! Why didn't you suggest those before?"
Whether they are called municipal or tax-exempt, bonds issued by states and localities really are something of an investment wonder. They perform a variety of investment jobs while also financing large and needed projects for the public good. Few investments can claim to do such heavy lifting for both the investor and the general public.
You have heard of municipal bonds, of course, and may know a few basics. But the municipal bond marketplace, once relatively sleepy and uneventful, has become an area of increased focus and opportunity. The serious questioning of the value and strength of municipal bond insurance in the past two years has caused fundamental changes in how municipal bonds themselves are perceived and valued. A fresh look at municipal bonds at this time can serve as a useful re-introduction to an important asset class and a reminder of the value to be uncovered within.
What are municipal bonds? Municipal bonds are issued by states, state agencies, counties, cities, towns, school districts, special districts, colleges and universities, hospitals and public enterprises such as water, electric and sewer systems. Even this list does not include all the kinds of issuers and purposes related to municipal bonds. There are over 50,000 issuers of municipal bonds, the vast majority of which come to market rarely and trade infrequently. Up-to-date information tends to be slow in coming and not easy for the average investor to grasp.
The size and diversity of the municipal bond market and uneven, delayed disclosure together make this asset class relatively inefficient. This inefficiency simply means that a wide variety of opinions exist as to what any particular municipal bond is worth at any given time. Think of the residential real estate market with thousands of houses on the market, each one having something different that accounts for the variety in asking prices among seemingly similar offerings. As any investor knows, there is value to be found in a large, fragmented market such as real estate. So it is with munis as well.
Both the real estate and muni markets, however, can be complicated and perhaps even a little daunting. When the list of positives for munis is laid out, it is easy to see why they can be such an important, even necessary, investment for investors. For starters, the tax exemption afforded to muni bond interest income (always attractive for high-net-worth investors) may become more meaningful given the prospect of higher tax rates down the road. Municipal bonds also have done a commendable job at helping investors with so many important investment needs. They have provided attractive after-tax yields among conservative investment choices, capital preservation for smoothing the volatility of an investor's total investment picture, safety, liquidity and abundant variety for diversification and customization. That is an impressive list of investment tasks, and all of them historically well handled by municipal bonds.
Interest rate and stock market cycles come and go. The lure of attractive returns on a variety of traditional and newfangled investments remains constant. Through it all, municipal bonds have continued their quiet, effective work. Other investments may garner more attention or have more fascinating stories to tell. But by quietly meeting a number of important investment needs, municipal bonds can be characterized as a key component in the investment programs of most high-net-worth investors. Recent fundamental changes in the muni market suggest investors can benefit from a fresh look at how they are navigating this challenging but important marketplace.
Tom Dalpiaz is senior vice president and municipal bond portfolio manager at Advisors Asset Management.
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