March 3, 2009
According to The Bond Buyer, the traditional ratio between Treasury bonds and triple-A rated munis has been 85.1 percent. In December of 2008, due to a sell-off in muni bonds and a surge of Treasury bond buying, triple-A 10-year yields reached an unheard of 186.1 percent of the ten-year Treasury. (“Low-Rated, Long-Term Munis Still Floundering,” The Bond Buyer, 2-25-2009) By going out 20 years, an investor could get 5 percent or better tax-free, or about 8 percent pre-tax equivalent yield. [Ed. Note: See our recent article on “Value in the Municipal Bond Market.”]
Rio Hondo Community College District (Los Angeles, County), a double-A rated general obligation bond issuer, recently sold zero coupon bonds due 8/1/31 at a 6.9% federal tax-free and state-tax free (for California residents and a few other states), with a unit price of 20.09. You could purchase $1,000 face value for $200.09, or you could purchase $25,000 face value for $5,002. That looks like growth to us.
Of course, if we have inflation the value of these bonds may diminish. A mitigating factor in price fluctuation is that every passing day brings the bonds closer to maturity and their redemption. However, market volatility in bond prices certainly beats losing 50 percent in stocks and then hoping your stocks will recover. Historically, inflation hurts stock prices. During the huge inflation of the 1970s, stock prices crashed early in the decade and didn’t improve in price until the early 1980s, once inflation began to decline.
The bond market is huge. Each type of bond has its own characteristics and pricing benchmark. They may move in tandem or independent of Treasury bonds. It is necessary to look beyond Treasuries for your investors and help them to enjoy the benefits of safe bonds.
Hildy Richelson is President and Stan Richelson is a Representative of the Scarsdale Investment Group, a registered investment advisor focused on providing fixed income solutions to high net worth clients. Hildy and Stan Richelson, are co-authors of Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg Press, 2007)
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