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Should You Sell a Few Stocks to “Stock Up” on Munis?

Those of us born between 1946 and 1964, known as “baby boomers” have dictated the major consumer trends of the past 25 years. Now, as we enter middle age and retirement, we are responsible for yet another trend, one which will have a special impact on fixed income investing.

Munis: Tax-Advantaged, Lower-Risk Retirement Investment

Many boomers have experienced stock gains over the past 20 years, both in their personal investments and in their companies’ retirement plans. The stock portion of their total investment portfolio has grown disproportionately large with these gains.

To maintain balance, the profits on stock purchases are likely to be or already have been reallocated to other asset classes, such as real estate and bonds, including municipals, for the purpose of diversifying risk.

Also, as is typical of people when they retire, when the baby boomers near retirement, they too will reallocate their portfolios to reflect a change in lifestyle. This generally means an increase in the amount of money allocated to the fixed income portion of their portfolios and, in particular, to municipal bonds. Why municipals? Municipal bonds are usually one of the only tax-advantaged vehicles left to individuals once they leave their companies.

Demand Up, Supply Low = Lower Rates and Yields

I believe that municipalities may become financially healthier, leading them to issue fewer bonds. This will reduce the supply of munis at the same time that Baby Boomers will be reallocating their portfolios more heavily into tax-advantaged bonds. The result will be higher prices for munis, lower yields, and lower coupon rates. Add to this the prospect of higher income taxes, and municipal bonds will become even more dear.

An Ameliorating Factor

A characteristic of boomers – one that has helped the economy – is that they are spenders, not savers. This may well mean that they will not leave the kind of wealth to their heirs that their parents left to them and, in fact, may be inclined to sell bonds to raise spending money.

Those who are used to active involvement in the management of their portfolios may tend to sell bonds to realize gains and losses and to reinvest. This behavior would cause an increase in the turnover of the existing supply of bonds and contribute to a more active secondary market and tighter spreads between the bid and offering sides of the muni markets. Tighter spreads and active markets mean fairer prices and more liquidity for everyone.

The Impact?

What does all this mean to purchasers of fixed income investments? They may want to begin purchasing a selection of very long-term municipal bonds now, with higher coupons and higher yields, and simply hold on to them. Then, when they reach retirement age if there is a high demand for municipals (and presumably lower coupon rates and yields), they would have the potentially profitable advantage of having set aside money that was invested at much higher rates.

It also means that investors may want to begin the reallocation of their portfolio into a greater portion of fixed income securities earlier than they expected – say, while they are in their early 50s rather than when they are in their early 60s. In advising baby boomers, I emphasize that while municipal bond yields may appear to be low today, investors may want to look toward the future, say 10 to 15 years out, when bond yields may well be significantly lower. The difference could mean attractive reasons to buy long-term bonds now, ahead of the rest of the baby boomers. Of course, no one can predict the markets with any certainty.

If your portfolio is greater than $500,000, Sharon Alister can provide a free analytic review to help ensure that your portfolio is in line with your investment goals. Call Sharon Alister at (800) 745-7110 or email info@AlisterTalksBonds.com

 

Interest Rates (Indications only)

Please note the rates for Ins’d and Pre-Res are not available from Bloomberg and will be updated as soon as possible.

Treasuries AAA Munis
3mo 1.815 N/A
6mo 2.009 N/A
1yr 2.237 1.74
2yr 2.482 1.87
5yr 2.809 2.19
10yr 2.970 2.53
30yr 3.145 3.14
today's rates chart

AAA Rated Munis

Pre-Res Ins’d Pure*
2 yr 1.91 2.05 1.87
5 yr 2.23 2.49 2.19
10 yr N/A 2.89 2.53
15 yr N/A 3.20 2.82
30 yr N/A 3.50 3.14

*Rated AAA on its own
Source: Bloomberg

Should You Sell a Few Stocks to “Stock Up” on Munis?

Those of us born between 1946 and 1964, known as “baby boomers” have dictated the major consumer trends of the past 25 years. Now, as we enter middle age and retirement, we are responsible for yet another trend, one which will have a special impact on fixed income investing.

Munis: Tax-Advantaged, Lower-Risk Retirement Investment

Many boomers have experienced stock gains over the past 20 years, both in their personal investments and in their companies’ retirement plans. The stock portion of their total investment portfolio has grown disproportionately large with these gains.

To maintain balance, the profits on stock purchases are likely to be or already have been reallocated to other asset classes, such as real estate and bonds, including municipals, for the purpose of diversifying risk.

Also, as is typical of people when they retire, when the baby boomers near retirement, they too will reallocate their portfolios to reflect a change in lifestyle. This generally means an increase in the amount of money allocated to the fixed income portion of their portfolios and, in particular, to municipal bonds. Why municipals? Municipal bonds are usually one of the only tax-advantaged vehicles left to individuals once they leave their companies.

Demand Up, Supply Low = Lower Rates and Yields

I believe that municipalities may become financially healthier, leading them to issue fewer bonds. This will reduce the supply of munis at the same time that Baby Boomers will be reallocating their portfolios more heavily into tax-advantaged bonds. The result will be higher prices for munis, lower yields, and lower coupon rates. Add to this the prospect of higher income taxes, and municipal bonds will become even more dear.

An Ameliorating Factor

A characteristic of boomers – one that has helped the economy – is that they are spenders, not savers. This may well mean that they will not leave the kind of wealth to their heirs that their parents left to them and, in fact, may be inclined to sell bonds to raise spending money.

Those who are used to active involvement in the management of their portfolios may tend to sell bonds to realize gains and losses and to reinvest. This behavior would cause an increase in the turnover of the existing supply of bonds and contribute to a more active secondary market and tighter spreads between the bid and offering sides of the muni markets. Tighter spreads and active markets mean fairer prices and more liquidity for everyone.

The Impact?

What does all this mean to purchasers of fixed income investments? They may want to begin purchasing a selection of very long-term municipal bonds now, with higher coupons and higher yields, and simply hold on to them. Then, when they reach retirement age if there is a high demand for municipals (and presumably lower coupon rates and yields), they would have the potentially profitable advantage of having set aside money that was invested at much higher rates.

It also means that investors may want to begin the reallocation of their portfolio into a greater portion of fixed income securities earlier than they expected – say, while they are in their early 50s rather than when they are in their early 60s. In advising baby boomers, I emphasize that while municipal bond yields may appear to be low today, investors may want to look toward the future, say 10 to 15 years out, when bond yields may well be significantly lower. The difference could mean attractive reasons to buy long-term bonds now, ahead of the rest of the baby boomers. Of course, no one can predict the markets with any certainty.

If your portfolio is greater than $500,000, Sharon Alister can provide a free analytic review to help ensure that your portfolio is in line with your investment goals. Call Sharon Alister at (800) 745-7110 or email info@AlisterTalksBonds.com

 

Interest Rates (Indications only)

Please note the rates for Ins’d and Pre-Res are not available from Bloomberg and will be updated as soon as possible.

Treasuries AAA Munis
3mo 1.815 N/A
6mo 2.009 N/A
1yr 2.237 1.74
2yr 2.482 1.87
5yr 2.809 2.19
10yr 2.970 2.53
30yr 3.145 3.14
today's rates chart

AAA Rated Munis

Pre-Res Ins’d Pure*
2 yr 1.91 2.05 1.87
5 yr 2.23 2.49 2.19
10 yr N/A 2.89 2.53
15 yr N/A 3.20 2.82
30 yr N/A 3.50 3.14

*Rated AAA on its own
Source: Bloomberg

Investing involves risk, including possible loss of principal. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. Conversely, as interest rates fall, bond prices will rise.

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