Municipal Market Commentary – August 14, 201408-14-2014 |
Why Own Bonds Now?
At a time when many market analysts are suggesting a rising interest rate environment, individual investors may be asking, is now the time to own bonds in my portfolio? That thought is really two different questions; first, should I keep the bonds I already own in my portfolio? And secondly, should I buy bonds to add to my holdings now?
Let’s tackle the first question first. The bonds that are in your portfolio currently are there for a reason; primarily to provide income and in the case of municipal bonds tax free income. So the first consideration in any sell or hold decision is whether or not you can replace the income generated by those holdings. Right now, the answer is probably not. While we can see a rationale for anticipating rising interest rates, the current market still is at historically low interest rate levels. The only reason to sell current holdings would be to capture the capital gains in bonds that were bought in higher interest rate environments. But those gains are taxable and when you sell your fixed income holdings you are giving up the income they generate.
Total return for fixed income investments are a combination of two factors, income earned and capital appreciation, generally from a rise in value in a falling interest rate market. Fixed income investors may need to recalibrate their expectations when it comes to the total returns bond may provide in the coming years. Because although rates may rise in the medium term, there are no indications that we will go back to the high inflation and high interest rate environment of the mid to late 1980s. Nor are there indications that the current low rates will continue forever. These considerations will mean that not only will income levels be lower than the past but also that capital gains will not be as big an element of fixed income total returns that many have become used to.
OK, you may be thinking the bonds I own, while showing attractive capital gains are paying me more than I could replace if I sold them so let’s not give up that income. That brings us to question 2, should I be adding to my portfolio with the purchase of new bonds? Wouldn’t it be prudent to wait for higher rates?
That gets us to the cardinal rule of successful fixed income investing; don’t try to time the market. If you have investment capital that you plan on using to generate income, don’t sit on the sideline. You may never make up the lost opportunity provided by income today by keeping dollars in the near 0% returns of a money market parking place. Buy the highest quality bonds offering the best return that is currently available. Today, tomorrow and always.
Investing in bonds involves risk including the possible loss of principal. Income may be subject to state, local or federal alternative minimum tax. When interest rates rise, prices will fall, when interest rates fall prices will rise.
Our Trader’s Analysis charts the U.S. Treasury Yield Spread To AAA Municipal Bond Yields.
Why Hennion & Walsh
We are specialists in tax-free municipal bonds.
Tax-free municipal bonds are Hennion & Walsh’s heritage – it’s who we are. When we founded Hennion & Walsh over 24 years ago, we started out as specialists in tax-free municipal bonds. We built our reputation by selling high quality municipal bonds to individual investors looking for potentially safe, predictable income that’s tax-free. Although we are a full-service brokerage firm today, including portfolio management services, our clients still enjoy the value of our expertise finding municipal bonds for their investment needs. We also still deliver the same one-onone personalized service we’ve provided since our founding in 1990.
Unlike some competitors, we offer individual investors direct access to municipal bonds in the primary and secondary markets. Bonds are a dynamic investment. While some of our clients are looking to buy and hold, others are interested in frequent trading opportunities. We provide the investment opportunities that each client is looking for with a full service municipal bond trading desk, current market information, and investing opinions designed to enable clients to make the right decisions.
Because of our active municipal bond trading desk we are able to identify and purchase blocks of attractive municipal bonds when they become available in the primary and secondary markets. In addition, Hennion & Walsh aims to offer investors the highest standards of professional conduct for their accounts.
Personalized service isn’t just a slogan at Hennion & Walsh. It’s how we do business.
It’s no wonder that many people turn to professionals for help, guidance, and advice when it comes to their investments. The question is to whom they should give this responsibility.
At Hennion & Walsh, we believe that the management of wealth should be taken as personally as its accumulation. We recognize the commitment our clients have made to building and maintaining their investments. Knowing this, how could we not manage and protect those investments as carefully – and as personally – as we can?
More than 15,000 clients call upon us for our advice and expertise. We deliver one-on-one attention that enables us to truly understand our clients’ needs and work in close partnership with them, regardless of account size. We do not have a call center or voicemail – we personally answer each call our clients make. We have built our firm’s reputation on developing strong, mutually beneficial relationships designed to last a lifetime.