Wall Street Best Editor’s comments: I’ve known Marilyn Cohen for more than 15 years through my work with the Money Show. We’ve sat on several fixed income panels together, I’ve interviewed her many times, and she is my ‘go-to’ person when I have a question about bonds. She manages money at her company, Envision Capital Management, and regularly writes articles for Forbes magazine. You can find her blog at: http://blogs.forbes.com/investor/author/mcohen/.
Three MWGRAY (Munis with Good Rates and Yields) Looking for the Right Investors
“Water, water everywhere…nor any drop to drink.” These lines come from The Rhyme of the Ancient Mariner. You’re not alone if these words resonate. This is exactly how many fixed income investors feel.
There are trillions of dollars of bonds available. According to the Securities Industry and Financial Markets Association (SIFMA) as of the end of Q-1, 2016, there was $40.5 trillion in outstanding bonds—an all-time high. Yet investors complain that they can’t find any acceptable bonds to buy.
What they’re really saying is they loathe the yields available.
Welcome to the new low normal in interest rates. You can sit on the sidelines and wait for rates to rise. But you may wait far longer than you care to.
However, there is a safe high-yield bond sector that you should look into.
The Safest Bond Sector
The safest bond sector at the moment is municipal bonds. This is true even considering the municipal bond bad buys: Puerto Rico, Illinois, Chicago, Atlantic City, Kentucky, Chicago Public Schools and Scranton, PA. The municipal bond market has had more upgrades than downgrades for the first time in seven years. That is one reason to do a deep educational dive into munis for your taxable and tax-free needs.
Yes, I said taxable needs.
Right now, the corporate bond market is a mirror image of the taxable municipal bond market. There are more corporate bonds being downgraded than upgraded. The credit quality of “average” U.S. corporate debt is at a 15-year low. The average corporate bond rating is BB—junk. Not good news, that’s for sure.
Don’t be surprised. These are the consequences of CEOs bending to investor’s wishes by issuing debt for share repurchases, increased M&A and unsuccessful buyouts.
As a sector, the municipal market is having another back-to-back good year even with the sinkholes previously listed. So invest some of your sidelined IRA or pension cash in taxable municipal revenue bonds. That’s right, revenue bonds—the ones without unfunded pension liabilities where the courts are favoring voters/pensioners over bondholders.
Some generalities about taxable municipal bonds:
1. It is easy to understand the sources of revenues that pay the bond’s interest and principal
2. Financials are issued only once a year unless there is a refunding or a new issue
3. Municipals in general have a lower default rate than corporates
4. There is no foreign currency exposure
5. The municipal market is unaffected by stock market swoons
6. There’s no media hype
7. It’s a small-ish sub sector of the muni market therefore less liquid
8. Defaults move in glacial time so you can see them coming and take action
9. No event risk like in LBOs that the corporate bonds encounter
10. Taxable munis are totally non-mainstream. I think that’s a good thing
Three Municipal Revenue Bonds for Your Consideration
Here are three municipal bonds for your consideration:
The Health & Educational Facilities Board of Met. Govt. of Nashville & Davidson County Tennessee
For Vanderbilt University Medical Center
4.053% due July 1, 2026 Series 2016B
Rated: A3 by Moody’s
Tustin California Unified School District
Community Facilities District# 97-1
3.35% due September 1, 2021
Rated: BBB by S & P with BAM Insurance
Massachusetts State Housing Finance Agency
Housing Revenue Series C
3.625% Due December 1, 2025
Rated: Aa3 by Moody’s, AA- by S & P, AA- by Fitch
Remember to check all call dates and that you earn a positive yield to the worst or extraordinary call.
We baby boomers are staring retirement in the face with interest rates at their lowest levels in years. Waiting and anticipating has only created opportunity costs. As market mavens say, “The trend is your friend.” And this trend of low rates has much longer to go.
Marilyn Cohen, Envision Capital Management, www.envisioncap.com, 800-400-0989
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks