Action Line: Municipal bonds remain a solid investment
BY PHIL MULKINS World Action Line Editor
Friday, February 01, 2013
2/01/13 at 4:58 AM
Dear Action Line: Should I worry about recent municipal bankruptcies, as far as investing in municipal bonds is concerned? - D.T., Jenks.
"Municipal bonds have received a lot of attention recently, partly because their tax advantages could become more valuable in 2013," said Certified Financial Planner Sylvia Karimian, a partner in Karimian & Associates, an Ameriprise Financial firm. "However, they also have come under scrutiny due to widely publicized bankruptcy filings by certain local governments.
"Economic problems, lower investment returns and cuts in federal aid have led to an increase in the number of local governments filing Chapter 9 bankruptcies in U.S. Bankruptcy Court. This includes the largest U.S. municipal bankruptcy on record - Stockton, Calif., (one of three California towns filing bankruptcy in one month)."
Despite this increase, muni bankruptcies are still extremely rare, as for June 2011 through June 2012, only 17 municipalities or local governments filed for bankruptcy. Compared to 9,285 Chapter 11 business filings during that time, the municipality number is small. Analysts express concern this number will pick up with increased cuts in federal aid, underfunded pension obligations and challenges in global credit markets. Predictions haven't come to pass, but the situation is worth watching.
Check your muni holdings through the Municipal Securities Rulemaking Board's Electronic Municipal Market Access database tulsaworld.com/MSRBEMMA Using the bond's CUSIP nine-digit identifier number, find trade confirmations and brokerage statements. Available information includes revenue sources pledged to repay the bonds and whether any bond insurance, letter of credit or other guarantees are provided for repayment.
The database doesn't include all municipal offerings and though it's updated yearly some of its information is outdated. Bonds' current credit ratings by one of the three major ratings agencies suggest their most recent status. However, a high credit rating doesn't reflect or guarantee bonds' market values or liquidity.
According to the Administrative Office of the U.S. Courts, municipal bonds are still good investments depending on your situation. Bond prices benefited from low interest rates and munis are no exception. Muni income is exempt from federal income taxes, enhancing their after-tax return relative to corporate bonds or U.S. Treasuries, as Treasury yields are at historically low levels, Karimian said.
Some munis, known as private activity bonds, may be subject to "alternative minimum tax." If investors in higher tax brackets adjust their portfolios trying to minimize next year's tax bite, increased demand for munis could have a positive effect on prices. No guarantees are given as uncertainty looms over Congressional spending cuts and a government shutdown in late March.
Current low interest rates won't last forever as bond prices move in the opposite direction from interest rates, and when rates do begin to go up, the increase likely will affect the value of all of your bond holdings, including municipals, said Karimian.
Original Print Headline: Municipal bonds remain a solid investment
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