Saturday, September 27, 2008

Municipal Bonds


Hello “Dollars and Sense” listeners,
Well, all the “fun” of the past couple of weeks has finally caught up to me. I’m at home in bed, missing work due to sickness for the first time in years. I was even going to sneak out later today to play golf but even that had to be cancelled. Oh, the humanity!
My voice isn’t working very well this morning but my fingers are still able to maneuver around the keypad, so I want to take this opportunity to pass along an item that I believe is VERY important to understand. As I’ve watched CNBC around the clock over the past couple of days, something I rarely get a chance to do, it has dawned on me that everyone seems focused only on the stock market. However, the real problem in the financial markets is on the fixed-income side. That’s the area that desperately needs open credit and trading lines, along with the renewed confidence that it’s okay to lend money again. Without a bailout plan, stocks will likely come back a little but probably won’t get hammered. Today is a perfect example as the Dow isn’t down very much this morning even though a presumed agreement of a plan has fallen apart. The talking heads seem absolutely shocked by this which tells me that they just don’t get it.
They should be focusing on the bond market this morning which is getting rocked…again. This has been the most maddening part of this very tumultuous September. Our defensive mechanisms have broken down along with equities this month as the credit markets have locked up. I’ll use just one example to make my point: the municipal bond market.
High quality muni bonds have suffered one of their biggest sell-offs EVER! People look at a AAA-rated, insured muni bond and just shrug their shoulders. “Why should I believe the rating agencies?” they ask. “They slapped Fannie and Freddie bonds with Triple-A status and we saw what happened with them, right? And who cares about insurance anymore? Just look at AIG.” In other words, trust and confidence have completely evaporated and no one wants to lend money anymore. THIS is the real issue, not the movement of stocks.
But here’s the silver lining. This has created one of the most attractive opportunities ever to buy muni bonds. Believe it or not, they actually yield MORE than Treasury bonds…which are taxable! Let me repeat that in a different way. Investors can now get a higher gross yield on a high quality tax-free bond than they can get on a taxable Treasury bond, so the net yield is even higher when you factor in taxes. This is a very rare event and only occurs during times of crises. I don’t know this to be sure, but the last time I remember this happening was in 1994 when Orange County declared bankruptcy. Muni bonds across the country fell dramatically, and that ultimately created one of the best buying opportunities I’ve seen in my career and I believe we’re there once again. The “spreads” in the corporate and municipal markets are extreme and that gap will eventually close. Fear and panic have created a real arbitrage situation for investors.
While the stock side of the equation remains “iffy” in our estimation, the bond area is ripe for opportunistic investors. I’m not talking about risky investments here, and certainly not Treasuries!, but an area like high-quality tax-free municipal bonds. This is not a direct recommendation, but rather a nudge for some of you to at least conduct proper due diligence in an asset class that appears to be fairly under-valued.
Make it a great weekend! (Yes, I do plan to host the show on Sunday).
David W. Simons, CFPâ
Vice President
Wealth Management Advisor
Senior Financial Advisor
Global Private Client Group
1630 South Lindbergh Blvd
Ladue, Missouri 63131
314-997-2367 Direct
800-937-0554 Toll Free
314-262-4290 FAX

1 comment:

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