Yay or nay on Munis?
June 22, 2011 12:16PM
Updated: June 23, 2011 2:15AM
Dear Mr. Berko: My $55,000 CD comes due soon, and I don’t mind investing long term if I can get a decent yield. What do you think of municipal bonds? I’ve read that the municipal market is oversold and there are many good bargains to be had. But by my thinking, the best reason to own municipals is that I believe personal tax rates will be forced higher by Congress to pay for an increasing national debt. Do you agree? What’s wrong with this picture? Can you make any recommendations? — HL in Aurora
Dear HL: You’re right as a button. The only caveat may be an inflation that, in the next dozen years, could erase the zero from every $20 bill in circulation.
But the nation’s debt will continue to defy gravity for sundry reasons. A growing silent majority of Americans don’t give a falcon or fiddle about the national debt. So neither Congress nor the administration has a mandate to do anything, except jaw for the vocal minority who care. Therefore, the national debt and your taxes will continue to grow.
An important metric shows that government spending averaged 18.8 percent of Gross Domestic Product since the 1970s. But a recent metric of the past three years demonstrates that government spending is now 28.2 percent of GDP, and a contumely Congress is covertly ecstatic. A 50 percent increase in their spending is a wet dream for most members of Congress (MOC) because it empowers their influence and importance. Some of Washington’s ubiquitous “stink” tanks believe government spending will rise to between 35 percent and 38 percent of GDP (QE-3) if the economy doesn’t heal soon. And if government spending rises to 38 percent, the current administration will give every congressman 72 virgins. But this may prove problematic because some MOC are trying to reduce the supply.
Now, since raising taxes on the few is less contentious than reducing benefits of the many, you can bet a bonny billion against a bloody dollar that rates will rise. According to John Boehner, R-Ohio, because “a 42 percent personal tax rate is possible,” municipals are a refuge and safe harbor against a rising tax rate. But there’s a move among MOC to eliminate the tax-free interest of municipal bonds. It’s called the Wyden-Coats Proposal (discussed in an earlier column), and it has the support of the Obama administration.
A decision to own municipals is a no-brainer, but the brainy part is finding the right bonds in the $3 trillion market. There is a lot of good stuff out there with 5.75 percent to 6.50 percent tax-free yields, which is a no-brainer compared to long-term taxable treasuries with after-tax yields of 2.7 percent. But for most civilians like us, it’s less risky and more efficient to own tax-free Exchange Traded Funds (ETFs) — listed on the Big Board. So consider the following:
1) BLACKROCK MUNI/ASSETS (MUA-$11.69) yields 6.4 percent. It uses 4 percent leverage and trades at a 5.95 percent to NAV. 2) INVESCO MUNI INCOME (OIA-$6.18) yields 6.80 percent. It uses 6.1 percent leverage and trades at a 6.23 percent discount to NAV. 3) NUVEEN MUNICIPAL INCOME (NMI-$10.06) yields 5.76 percent, has no leverage and trades at a 4.18 percent discount to NAV. And 4) WESTERN MUNI HIGH INCOME (MHF-$7.31) yields 6.07 percent, uses no leverage and trades at a 2.92 percent discount to NAV. Invest $13,750 in each. Then enjoy a diversified portfolio of more than 120 issues, a combined tax-free yield of 6.23 percent, which is a taxable equivalent of more than 10 percent for investors in the top bracket.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at email@example.com.