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Tax-Free Bonds: Why Now is the Time to Buy Munis
by Alexander Green, Advisory Panelist
Monday, June 22, 2009: Issue #1023
I’ve said it before and I’ll say it again. Buy tax-free bonds – now.
- Buy them through Vanguard if you are a mutual fund investor. (The average fund company charges expenses six times higher than Vanguard’s.)
- If you are a closed-end investor, try a tax-free fund like Nuveen Insured Municipal Opportunity Fund (NYSE: NIO) trading at a 10% discount to its net asset value and yielding over 6% paid monthly.
- Or, to avoid annual expenses and have the certainty of a final value on a particular date, buy individual tax-free bonds.
But, whatever you do, buy them – now.
Tax-Free Bonds: Why It’s Time To Buy Them
So, why is now the time to buy tax-free bonds? Let me count the ways:
- Ten-year municipal bonds, while down from the historic premium they reached a few months ago, are yielding as much as 10-year Treasuries. Treasuries are taxable. Munis are not.
- Most municipal bonds are safe. Yes, a few areas – particularly in California and Alabama – are troubled. But the historical default rate on municipal bonds is just 0.3%.
- Taxes will soon be going higher. A lot higher.
Yes, I know that President Obama, when he was candidate Obama, promised a tax cut for 95% of Americans. But that was then and this is now…
In the meantime, we’ve seen the federal government:
- Ride to the rescue of General Motors and Chrysler…
- Pass a massive $787 billion economic stimulus…
- Spend hundreds of billions more to recapitalize banks…
- Bail out insurance companies…
- And “fix” the mortgage market.
Now the Obama administration is:
- Proposing the biggest changes to the health care system since the advent of Medicare in 1966.
- Planning to spend billions more to lighten our dependence on foreign oil and reduce carbon emissions.
- Now urging policy makers to rewrite the rules governing the entire U.S. financial system, spending who knows how many billions more.
As for candidate Obama’s promised tax cut, I’m reminded of the remark former Clinton aide George Stephanopolous once made to Larry King, “The President kept all the promises he intended to keep.”
The Consequences of Federal Spending & Encroachment
The consequences of all this new federal spending and encroachment into the private sector won’t be fully apparent for years to come.
But the wild fiscal imbalance is already crystal clear. Washington politicians will soon demand that you sacrifice even more of your paycheck so that they won’t have to sacrifice the near erotic charge – and high incumbency rate – they get from spending it.
This is ironic when you consider that to a large extent it was government that landed us where we are today.
Sure, the mortgage boom and housing market bust was due in part to shameless lenders, greedy borrowers, and unscrupulous Wall Street types. But who set the stage for them?
- Who took short-term rates to the cellar, creating a massive incentive for consumers and investors to borrow?
- Who gave real estate investors a $500,000 tax exemption on their profits from flipping houses every two years?
- Who passed laws criminalizing banks’ failure to lend to subprime borrowers?
- Who set up quasi-government institutions Fannie and Freddie – or, as I prefer, Phoney and Fraudy – to warehouse those bad mortgages, leaving taxpayers to pick up the tab?
The answer? The federal government.
As The Free Market System “Fails”…
And what will we get as a result of this supposed “failure” of the free market system? More federal government.
I’m not sure whether to laugh or cry. But I am sure our Founding Fathers must be spinning in their graves.
- Thomas Jefferson said, “That government is best which governs least.”
- George Washington said, “Government is not reason, it is not eloquence, it is force.”
No wonder polls show that more than 60% of Americans are skeptical of increased government intervention in the economy.
They suddenly recognize that we’re in for a lot more government, a lot more “market failure”… and a lot more taxes.
Sadly, there isn’t much you can do about it… except buy munis now.
Good investing
Alexander Green
- Municipal Bonds: A True Once-in-a-Lifetime Opportunity
- Municipal Bonds: The First “Obama Investment”
- Municipal Bonds: Two Muni-Bond Fund Investment Opportunities
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10 Responses to “Tax-Free Bonds: Why Now is the Time to Buy Munis”
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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June 22nd, 2009 at 11:21 am
who do you think the gov’t is? it is us Alex. now i personally do not have a lobbyist but the corporations sure do. nobody gets elected in America w/out $$$$$$$$$$$$s and lots of them. power is bought and someone paid for all the legislation you complained about. and don’t act all innocent either.
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Wayne Whitmore Reply:
June 22nd, 2009 at 8:48 pm
I am glad to hear you (and so many others) starting to sound like libertarians!
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June 22nd, 2009 at 11:32 am
Thomas Jefferson may have had some pithy statements about small government, but was $100K in debt when he died July 4,1826. Not a great example to use for investment advice.
M
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June 22nd, 2009 at 1:30 pm
My dad’s Oppenheimer Calif Muni Fund lost 50% in a very short time last year. I have been selling my bonds when they get back to 90% of par because the risk is too great of hyperinflation. With a total federal liability of $99,000,000,000,000 (Dallas Fed Reserve Bank) inflation is unavoidable.
Your comments on government being the cause is correct. The problem is that the voters put them in office. With integrity something from the past and a steep decline in the quality of the American people I do not think our economy will ever come back. The real question is when will it completely collapse!
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June 22nd, 2009 at 1:45 pm
what makes you think the municipal bond rates will not also rise dramatically, thus driving down the value of those investments.
the local governments will be impacted by state and federal fiscal instability, and lowered contributions from them, and thus will be required to seek additional borrowings while they attempt to raise taxes, which may take some time
it seems to me that bonds are not the answer.. of course i will be wrong, if we head down a deflationary pathway for a long time
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June 22nd, 2009 at 2:15 pm
look at glenn beck for what you might do vrs running in circles yelling the sky is falling! cause if you don’t start doing something soon you aren’t going to have the freedom to do anything.
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June 22nd, 2009 at 2:57 pm
MY CONCLUSION AFTER READING THE ARTICLE WAS TO INVEST IN TIPS (INFLATION PROTECTED SECURITIES ) AND GOLD OR PRECIOUS METALS RATHER THAN MUNI’S. AS STATED BY OTHERS,THE BOND PRICES WOULD GO DOWN AS INFLATION TAKES OVER
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June 23rd, 2009 at 5:50 am
I think the plan of all governments is more
government. As citizens we have to legally find
ways to prosper.
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June 23rd, 2009 at 11:40 am
Dear Alex:
I want to thank you for your weekly articles, I have been enjoying them a great deal. In reading David McCullough’s surprisingly fascinating book about John Adams I discovered that Thomas Jeferson spent almost his entire life in debt. He was a prolifigate spender, with no sense of self-discipline and probably not a good example for those of us trying to deal with the current economic crisis. Thanks again and keep ‘em coming.
Sincerely,
David M. George
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June 28th, 2009 at 9:32 am
Munis are only as good as the tax base behind them and real estate values are in the dumper and still falling everywhere in the US except in North Dakota.
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