Daily Money Tip: Two tips about municipal-bond investing

Posted: March 14, 2014

If you are a municipal-bond investor, we have two news flashes for you.

First, we found a local money manager who recently purchased some Puerto Rican muni bonds, despite the island's debt downgrade to junk-bond rating some weeks ago. For investors with a high risk tolerance, Puerto Rico debt yielding about 8 percent tax-free has drawn some sophisticated buyers.

Second, a new study out of S&P Dow Jones confirms that Wall Street is getting one over on us when it comes to municipal bonds: If you try to buy individual munis yourself, you are getting hosed on the price.

On Puerto Rico, we circled back to David Kotok, chief investment officer at Cumberland Advisors of Vineland, N.J., to find out whether he liked Puerto Rico's new bond issue last week.

"We have certain segregated accounts that are Puerto Rico-only, and we position certain P.R. debt in them. We do not do so for high-grade accounts," Kotok said. "We must remember P.R. is a junk credit."

Puerto Rico muni bonds have attracted some atypical buyers, such as corporate junk-bond investors and hedge funds.

"These are not typical high-grade muni buyers, so their pricing behavior is not a reflection" of how risky these muni bonds truly are, Kotok added. Still, an 8 percent yield tax free is tough to beat. Similarly rated corporate bonds yield about 4.8 percent, according to Bloomberg data.

Want to buy munis?

Don't do it yourself. Leave it to your portfolio manager or an exchange-traded fund (ETF).

That's the upshot from J.R. Rieger, global head of fixed income at S&P Dow Jones Indices, who found that a retail investor pays about twice the transaction cost for a muni bond as for a corporate bond.

In December, the average cost to buy an individual municipal bond was 1.73 percent for retail investors. An investment-grade corporate-bond transaction cost roughly half that, at 0.87 percent.

"Buying a muni bond entails an unseen transaction cost, which may not always be clear to retail investors," Rieger said in an interview. Because muni bonds are sold without commissions, brokers make up the difference by padding the price and building a markup into the muni bond.

"We don't know what the markup is exactly," Rieger said, but he suggested that retail investors stick with muni bonds in either mutual funds or ETFs.


erinarvedlund@yahoo.com

646-797-0759

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