Is Panic In Municipal Bond Market A Buying Opportunity?

The only thing certain about the future is that some things will change and some will remain the same. Anonymous

If you have followed the bond market for a long time then you are prepared for volatility.

If you are new to the bond market then, before you act, gather and analyze historical bond market data.

In recent past years there was a great deal of volatility in the government bond market related to the sovereign debt crisis, where countries faced the prospect of bankruptcy. Bets were placed. How did that work out? Who lost money in the bond market and why? Until you understand how and why perhaps you should not be making an significant moves into the bond market.

What is rational behavior in the current market, with the U.S. Fed preparing the public for months (years?) for an interest rate hike . . while European central banks appear to be heading in the opposite direction? How will money be moving into and out of sovereign debt funds?

And what of China, where inflation appeared poised to move up wildly, only to be followed by a plethora of news about China’s growth dramatically slowing and threatening the world economy? Commodity markets, in consequence, have tumbled to earth.

 

What is rational in this economy is not to panic but to know your investment, know a good bit about history – the interplay of your investment choice and market forces – and to understand how values moved over time.

Remember in 2008 the Dow Jones industrial average broke 7,000, diving to about 6500? People panicked and sold. Some stayed on the sidelines. Others bought. The Dow is above 17,000.

 

 

Do your due diligence. Speak to a bond professional. Ready everything you can, even if you feel compelled to read it as fast as you can. That’s okay. At least you’re doing your best to NOT INVEST EMOTIONALLY. Read. Discuss. Sleep on it. Talk to your financial or investment professional. Sleep on it. Really, the mind works best when it has time to digest and is well rested.

Then decide.

Trust me on this: the worst investment decisions I have made were the product of a rush to judgment.

Risks Associated with Buying Bonds

Bonds are, by comparison to others, a secure investment.  There are, of course, some that have greater bond risk than others. Foreign bonds contain some of the highest risk depending on the sovereign entity one buying a bond from.

Apart from Moody’s rating system, there are other ways to determine bond risk

  • Stability of the bonds currency
  • Government stability
  • Current events, both global and domestic.

The currency of a bond is a factor that makes a bond more or less risky. The rate of return for domestic bonds tends to be on the current market return.  For bonds, some of which mature after decades, there is the risk of inflation diminishing the worth.  All bonds carry the risk of a loss of principal when interest rates rise.

One can also look at the current events to simulate the risk of a government bond.  Instability of the government can make the bond less appealing, and make it a riskier investment.  Take for example how on May 24, 2010 Spain seized a “troubled regional bank.”  This instability creates uncertainty and a lack of trust in the government’s ability to repay debts.  Being part of the European Union (EU), this affects all of its members, and makes uncertainty arise across all of its members.  Unlike the American government, which can print more money if there is trouble paying the owed bond, the government cannot print more money, since it is not just their currency.

Another recent event that could show a bond being more risk than one would expect would be the labor strike in Greece, along with its international rescue loans worth $140 billion. Bailouts of this kind cause trust to dissolve in the government.  Though the fear of a government in established governments is next to nothing, the fear of power change and policy shifts could do the same as far as impact on ones investment is concerned.

To sum up, the bonds of today harbor some risk, as any investment does.  Even in the stability of the United States, there is concern of inflation rising reducing bond worth.

How to Buy Government Bonds

The government bond funds are an investment like any other bond.  Government Bonds from the U.S. are considered to be some of the safest bonds you can buy.  Not all governments are as reliable and secure in repaying their debts, but for most cases, buying government bonds tend to be the safest bond investment.

Purchase Government Bonds

If you are interested in purchasing U.S. bonds, you can do so through brokers and banks, or directly through the Federal Reserve Banks.

To purchase a treasury bond, one pays the initial price can be at, higher or lower than the face value of a bond.  After purchasing, a government bond will pay interest every six months until they mature. The bond also has a set maturity time up to 30 years, after which, the buyer is paid the bonds face value.

These bonds are issued to help in financially supporting the federal government, and as such will be sold by the government so long as they need more money. There are even new inflation-indexed bonds (I-bonds) which are there to help protect the purchaser from the effects of inflation.  While the profit is minimal and the investment period is long, this is still a good investment.  It is ideal for those who are content with safe, small returns, but want to ensure a return regardless of inflation.

Drawbacks of Government Bonds

The same points that offer security to investors diminish the investors profit for government bonds.  The high level of security in the government bonds make them offer moderate returns, since there is very little risk.  One can use the purchase of such bonds to diversify a portfolio and minimize risk.

Another drawback is the longer time it takes for the bond to mature.  The principal cannot be regained until the bond is retired at its maturity, which can be up to 30 years down the line unless the bond is resold.  Such a trade of bonds would still require a transaction fee for the broker or a bank, and cost some portion of the money that they would otherwise receive if they had been patient and held the bond until maturity.