August 1, 2013:
Let’s talk today about municipal bond investing. I am looking to add to my municipal bond portfolio. Muni funds have been selling off for the last couple of months, ever since the Fed hinted that it would start to taper its massive bond purchases, thus sending interest rates higher. The markets have already done the Fed’s work – the yield on bonds have increased a full point since May, causing most muni closed-end funds to lose 20 to 25% of their value. For investors, lower bond prices equal higher yields; remember, a bond’s price moves inversely with interest rates.
In addition, many analysts feel that there are major problems lurking in muni bonds. Detroit’s high profile bankruptcy in July, as well as the bankruptcies of Stockton and San Bernardino have called attention to cities that made poor financial decisions. The thought is that their bonds are heading for default.
Fearmongering is a popular sport on Wall Street. Most of the time, it turns out to be poor advice to follow.
My feeling is that this 20-25% move is overdone, and it is setting up a nice buy point for muni funds. As I live in California, I am watching a few funds that are tax-free in CA. Most funds have fees and expenses over 1% which isn’t great, but is unavoidable.
Another plus is that many funds are trading at a nice discount to NAV. For example, the Nuveen California Performance Plus Municipal Fund (NCP) is trading at a 6.23% discount to the net asset value, or NAV. This means your are buying the fund’s assets at 6% below their true value. It’s annual expenses is 1.51%, which is high.
NCP was trading at around 16.25 in May. Today it is 13.31, about a 20% move lower.
Yahoo Finance has a great feature I recently discovered. If you look up a stock or fund, and go to Historical Prices, you can check the Dividends Only box and see the dividend history for as far back as you want. This is very useful, as many of the fund’s websites only show dividend history going back a few years. I want to see if the fund has a history of keeping dividends stable or growing, not just for the last few years but for many years. Many funds that have reduced their dividend payouts remove this info from their websites.
I will post my new muni bond fund purchases when I feel the time is right. I think we are close now, but muni funds are still declining almost daily. So patience is key here…..
Municipal bonds should have a place in every investor’s investment portfolio. Remember, income is tax-free at the federal level, and tax-free at the state level if the bond or fund invests in bond’s in the state you live.
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