The best place to find income is…
Where few are looking. And right now, few are looking at municipal bonds.
That’s not surprising. After all, who would want to buy Jefferson County, Alabama bonds? It just declared bankruptcy.
What about Vallejo, California? Not many takers there.
How about the capital of Pennsylvania, the city of Harrisburg? No, this city went bankrupt. Then U.S. Bankruptcy Court Judge, Mary France, declared its bankruptcy invalid. Now the city and its creditors are in limbo.
These are just a few examples of bad municipal bond investments. But given the sleepy state of this market, these few problems have caused widespread fear. The fact that ANY municipality could and would go bankrupt has given investors pause.
That’s good news for us. It’s cleared the way for us to scour the landscape for deals.
Our Survival Depends on It
There are several municipal bond options to choose from, but there’s really only one type of bond I’d consider: essential service bonds, like water and sewer bonds.
These are backed by payments for use – that is people paying their water and electric bills every month – making them a safe way to boost your fixed income.
Think about it. Water and sewerage are essential to our survival. Few, if any, will simply stop using them and/or paying for them even as the economy slips back into recession.
Toll road bonds are also a good choice, particularly in crowded areas such as North Texas. Unless a mass protest on the use of a particular toll road arises, payments are very predictable. As a bond holder, this filters down to you. And in the fixed income world, that kind of security is what you need.
But why do we need fixed income sources now?
Because the Federal Reserve is doing everything but its job.
Recently it announced it has an inflation target of 2%.
Now, the idea is, whenever inflation runs above 2%, market participants can anticipate the Federal Reserve moving to squeeze liquidity out of the economy. Excess credit dries up, loans are harder to get and short-term interest rates rise. If inflation falls below 2%, the market can expect easier credit and lower rates.
This sounds good in theory.
In practice, it’s not working.
Inflation recently printed at 2.8% year-over-year. Even the much-vaunted “core” inflation rate, which ignores “little” things like food and energy, came in at 2.2%. In theory, this means we could expect the Fed to start tightening, shrinking credit and raising interest rates. But nothing of the sort is happening. We’re going the other way and it hurts.
So what is a fixed income investor to do?
Look to the essential service bonds for income. You can research them by going to www.emma.msrb.org. The Municipal Securities Rule Making Board (MSRB) created this Electronic Municipal Market Access website to give investors more information on municipal bonds.
It enables you to find documents on almost any bond issuance!
And doing your research in this market has a big payoff. How does a tax-free yield that’s higher than Treasuries sound to you? Well, there are literally thousands of such bonds available for those willing to look a little further for income.
Best of success,
Editor, Boom & Bust
P.S. We’ve written before about a little known corner of the muni market, where the U.S. government guarantees 35% of the interest payments made on the bonds. Issuers, such as the state of California, used the proceeds for big projects like roads and bridges. The interest on these bonds is taxable because of the U.S. government’s involvement, but the yields are typically over 6%! Not bad. Not bad at all. Boom & Bust