Sunday, December 6, 2009

Muni Bonds at Risk

"Municipal bonds are favorites of widows and others seeking stable, even staid places to tuck their money. This year, however, they have performed more like go-go stocks. ... Two facts go hand in hand with this kind of performance. One is that yields aren't as good as they were at the beginning of the year. The Bond Buyer index of 20-year general obligation municipal bonds is priced to yield 4.39% to maturity, down from 5.16% in January. The other is that the widows should be on guard against the risk. Something that can go up 46% can just as easily go down 32%, back where it started. ... So far this year, [investors] have dumped a net $60 billion into tax-free funds. ... Thus, a state that otherwise might have paid 3.9% on a long-term tax exempt bond instead offers a 6% taxable coupon, then gets 2.1% back from Uncle Sam. ... Build America Bonds [BAB] have two effects on investors. One is that they now have the option of tucking high-yield munis into their tax-deferred accounts like IRAs. The other is that states and cities are finding the [BAB] deal so attractive they are cutting back in issuance of conventional tax-exempt bonds. This has reduced the supply of, and driven down the yield on, tax-exempt munis of the sort you'd put in your taxable brokerage account. ... The shrinking supply of conventional munis has helped send yields on triple-A-rated one-year paper from 2.4% at the beginning of the year to 0.4% now. ... That has prompted investors to stretch to earn more. Some are doing so by buying longer-term bonds and assuming greater interest rate risk", my emphasis, Scott Woolley at Forbes, 30 November 2009.

Teresa Ghillarducci must be beaming. Imagine, you can put BAB's in your IRA. Good luck.