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Municipal Musings

I got my start in the municipal bond field. Being new to the business, I was happy to offer clients investments that were considered completely safe, provided tax free income in a high tax state, and I bought into this investing regimen with gusto. Later it turned out the firm I worked for was overcharging clients so much, they were fined hundreds of thousands of dollars, forced to reimburse investors, and their head trader was suspended for six months. Unfortunately, this sort of thing still goes on, as evidenced by the trading activity on this Port of NY/NJ Authority bond:*

Trade Date Time Price Yield (%) Trade Amount ($) Trade Type

10/16/2015 03:33 PM 102.669 2.898 40,000 Customer sold

10/16/2015 02:35 PM 104.748 1.500% 10,000 Customer bought

10/16/2015 02:11 PM 100.689 4.267% 10,000 Customer sold

10/16/2015 02:04 PM 103.189 2.545% 10,000 Inter-dealer trade

10/16/2015 02:04 PM 103.439 2.376% 10,000 Inter-dealer trade

10/16/2015 08:12 AM 104.757 1.494% 20,000 Customer bought

Note that the yield ranges from 4.267% to just 1.5% within minutes of trading. If you're still buying bonds- municipal or corporate- from a traditional broker/dealer channel, you may not be getting the yield you deserve. Pricing is more “transparent” than ever, but abuses still occur. One of the advantages of being an independent advisor is that I don't have an in-house trading desk to add a mark up, and years of experience do help in making better choices, and spotting unusually high pricing spreads that should be avoided.

Not that I've sold too many municipals of late. Yields are so low, even with long maturities, there's hardly any value in the space to justify buying new paper.

I practically weep when an existing piece that was paying close to 5.00% before adjusting for taxes gets called in. It's not just the rate environment that's holding us back: there is very little in the way of new issuance hitting the market.

Most bond offerings these days are “refundings,” which are merely refinances of existing debt into lower yields, with little in the way of fresh funding for new projects. Unfortunately, the lowest financing costs in generations has not been enough to entice municipalities to go out and fund sorely needed infrastructure improvement, a lot of which has been traditionally handled by localities, not just the Federal government. Many in the municipal space think they're missing out on a great opportunity, and contrary to the nation's aversion to new debt, these projects DO pay off handsomely, some monetarily, as improved infrastructure facilitates enhance commercial activity, many in terms of sheer job creation, but also in terms of property value and local wealth.

Pride of ownership counts for a lot, whether publicly or privately held, and public spaces and facilities that are up-to-date, technologically current, and pleasant to admire do a lot for civic pride and engagement. They attract a more affluent population who will spend and invest in their local economy, and that results in a less transient population, which is the foundation of a stronger community. These are powerful forces that people don't take into account when they consider the costs of undertaking these improvements. When this window of opportunity passes by, there'll be a lot of “if only we took advantage” being heard.

*CUSIP 73358TZL8 Port of NY/NJ Authority 4.75% of '37

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