Overpowering demand; Gives a trough to the lows of the 1950s; No end in sight-these are just a few of the titles from the municipal bond sector. Elders, youth and markets have never seen such a continuous rush to buy municipal bonds. The ghost of Meredith Whitney’s past flies away.
As a bond manager and municipal bond investor myself, the market is grossly overvalued. Can it be overvalued? Of course. But for me, it’s time to put the brakes on.
The most overvalued states are of course the most confiscating states: California, New York, Hawaii, Oregon, Minnesota, New Jersey, Vermont, plus the District of Columbia. Their tax rates can suffocate a perfectly healthy investor.
I wrote several times in 2019 about this tsunami of liquidity in municipalities and their overvaluation, which has reached epic proportions since.
No, I’m not bearish on interest rates. I still think the rates will stay lower longer. But, as with all investments, there is a point where we start to assess. It can be the ceiling rate for a real estate transaction. It can be the price / profit ratio of a company whose reputation is a good idea but not a profit.
So take a break and calculate the yield on a taxable corporate bond versus the microscopic yield on a tax-free municipal bond and see what works best for you. If math is not your strong point, the simplest calculator is CalcXL. Enter the municipal bond yield you want, then enter your federal and state tax brackets, and here is you will see the taxable return on corporate bonds or CDs.
Be aware when comparing a municipal bond to a business, their call dates and deadlines should be similar.
If you live in a high tax state and find yourself in a high federal tax bracket, these record high municipal bond prices and low yields can wipe out most of the tax breaks.
Obviously, the coronavirus affecting all sectors of the global economy, I recommend bypassing for the moment one of my favorite municipal bond sectors: airport revenue bonds. Between flight cancellations and reduced supply chains, I expect a massive drop in freight tonnage passing through airports. So be patient. The meager revenues from airport revenues reported by the top ten American airports are not attractive at the moment. But they can turn around.
Good for issuers who issue new municipal bonds at yields never seen since the 1950s. Bad for us, the investors, since a bond repayable over ten years AAA gives between 0.97% and 1.00%; 20 years, 1.33%; and 30 years, 1.50%. There is no 2% unless it is a story link or a Muni junk.
Are there good deals on corporate bonds? Not yet. But they can come depending on the extent and longevity of the coronavirus. Keep on your radar those companies that are already lowering their quarterly earnings and profit forecasts. Investors can panic and dump their bonds. This is a perfect opportunity for you to collect them.
They’re not the apples and microsofts in the corporate bond world. These links are as pure as possible. I’m talking about BBB credits like Broadcom, Hasbro, Seagate and Jabil.
Look at the bonds actively traded on Investing In Bonds.com and examine which names are coming up. This is the old Wall Street saying: When they cry, you should sell; When they cry, you should buy.