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Bond Investing

Three Ways to Play a Muni Bond Rebound

Three Ways to Play a Muni Bond Rebound

You have three primary choices…

  1. Buy a low-cost municipal bond fund.
  2. Invest in a closed-end bond fund.
  3. Buy individual tax-free bonds.

Let’s take the last one first. If you buy individual bonds, you’ll see their price fluctuate. But if you hang on – and there’s no default – you’re guaranteed of receiving $1,000 per bond at maturity.

Worried that the municipality and the insurer could both default? (Unlikely but not impossible.) Then buy only tax-free bonds insured by Berkshire Hathaway Assurance Co., a subsidiary of Berkshire Hathaway with a stellar AAA-credit rating. You can’t get much safer than that.*

And if you don’t want to select individual bonds?

The Low-Cost Muni Bond Option

Option #1 above includes investing in a low-cost fund like the Vanguard Long-Term Tax-Exempt Fund (VWLTX). The current yield is 3.28%.

Sure, it yields less than some individual bonds and there’s no guarantee of principal. But it will be less volatile than 20- or 30-year bonds and you can reinvest monthly dividends if you’re so inclined. (Those in high-tax states will want to choose a state-specific Vanguard fund, of course.)

Want to play a potential muni-bond rebound more aggressively, with a higher yield and greater capital appreciation potential? Go for Option #2…

Why You Should Pick Up Tax-Free Bonds Now

Consider the Nuveen Insured Municipal Opportunity Fund (NYSE: NIO).

This closed-end fund also holds a portfolio of high-grade tax-free bonds. It’s actually cheap by closed-end fund standards. Many closed-end funds have expenses that total more than 2% per year.

This fund currently yields 8.5% and the income is exempt from federal taxes. If you reside in the top tax bracket, you’d have to earn 10% to get this after-tax yield. Why is it so high? Because the fund is using leverage, the equivalent of buying bonds on margin. If muni bond prices rise, this fund will really jump.

But will they? I don’t have a crystal ball. But recognize this: If you’re any kind of contrarian, now looks like a good time to pick up some tax-free bonds.

Good investing,

Alexander Green

 

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of professional analysts.


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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