Never in the history of mankind has there been a worse time to consider buying municipal bonds.
The 30-year US Treasury rate has just moved from 2.50% to closer to 3% in the aftermath of Trump’s election. The Federal Reserve is poised to begin raising interest rates. Higher oil prices will cause inflationary pressure. Global yields are low and there is a significant risk of continued outsized dollar strength if short-term interest rates are allowed to move up dramatically, at the same time as the long end of the curve is clearly about to normalize.
So, let’s not mince words - a move from 3% to 4% in the 30-year rate would imply a loss of about 30% of your principal were you to own a 25 to 30 year tax free municipal bond.
The 30-year bond is certainly going to 4% and maybe higher over the next two years.
A relatively new municipal bond house has recently begun advertising heavily on CNBC, Fox Business and Bloomberg. Their ad begins with a senior woman, together with her husband, saying “We are at a point in our lives where we need the tax free income that municipal bonds provide.“ This same firm’s website and there free municipal bond guide which they may mail you if you call them, states:
We can’t predict the interest rate market and we do not believe that you can either. What we can predict is that over time rates will go up in the market and they will go down. In our experience, the strategy that has worked for many successful municipal bond investors is not to try to out guess the market. Rather, staying invested is typically more important and a more successful investment strategy than timing investment decisions.
At this moment in time, this is dead wrong. Any reasonable interest rate observer can predict a normalization in bond yields at this point. It would be a serious mistake not to predict that. And, it would be worse still to get sucked into a municipal bond purchase at precisely the wrong time, leaving yourself and/or your estate with tremendous capital losses in a very short period of time.
Tip: Prepare to wait a couple of years until long bond yields normalize. Do not buy municipal bonds with longer than a 2 year maturity until you see a 5% pre-tax yield to maturity (4.75% if you live in New York or California). Stay with savings accounts and short-term CDs instead.