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Interest Rate Risk on Muni's

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Apr 7, 2010 2:01 pm

Am I the only one that thinks that the Interest Rate Risk on Muni's will be offset by both supply/demand and rising tax rates?

Apr 7, 2010 9:39 pm

No you aren't. That's a pretty common conclusion. There are historical references to that theory that bear that out as well.

Apr 9, 2010 3:57 am

Please elaborate?

Apr 9, 2010 2:23 pm

Look at the historical rates on Long Term Muni Bonds for the last decade. They hovered around 4-5% despite the fluctuation in the 10 year Treasury and short term rate fluctuations. This includes a lower tax rate environment. During the 90's tax rates were higher and Muni's only cracked 6% a few times, but most of the time hovered in the 4-6% yield range. Right now Muni's are trading at a historically high spread to the equivalent Treasury Bond. All of these factors depict how stable the muni bond market has been historically and how it is not as highly correlated to interest rate changes as many would have you believe.

Apr 9, 2010 4:00 pm

Our Hartford wholesalers recently brought their economist, Dr. Bob something, to the area to speak to a group of us.  He said basically the same thing.  He said he thinks Gentle Ben will raise interest rates by 150 bps before the end of the year.  And he said he won't touch them before the elections in Nov.  So, that means 150 bps in Nov and Dec.  He said 75bps each time.  He said to get out of anything Treasury or Agency and that the safe haven would be corporates and munis.  He said in a perfect world he'd look at corps and munis 2 years or less.  He said the bubble in the fixed income area will be bigger than the tech bubble of the 1990s. 

That's just one economist's opinion, so take it for what it's worth.