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.

Types of Government Bonds

As far as choice goes, the federal government offers an array of bonds, treasuries, and other investment options to any US citizen. Of the bonds offered, the more commonly purchased are government bonds, t-bills, and i-bonds.

Government Bonds

Government bonds considered the safest of the bond investments. These bonds are normally issued in terms of 30 years and pay interest every six months until they mature.

The cost can be whatever market rate demands.  Thus the price can be any of three options; equal to the face value if the bond and market return are equal, higher if the bond offers a higher return than the market risk requires, or less if the bond is offering less than the market expects for the risk.  When one feels their investments in the market are too risky and they are too venerable to a recession could always purchase these to help minimize such fears.

T-Bills

T-bills are another investment option the federal government sells. These bonds mature in one year or less, and are always sold at a discount from their face value. All profit from purchasing a t-bill comes from the difference in the face value and the actual cash amount paid for the t-bill.  There are no interest payments on the t-bills.

I-Bonds

I-bonds or inflation-indexed bonds, offer a way to help protect against inflation. These types of bonds are considered to be low-risk bonds. I-bonds protect the investor from inflation. Inflation indexed bonds comprise over $1.5 trillion of the international debt market.

Buying Government Bonds

To purchase any and all of these bonds, one does not even have to leave the comfort of one’s own home.  Most purchases can be made from TreasuryDirect, which is commonly used by individuals purchasing government bonds. Other purchases of government bonds can be made through brokers and banks or directly through the Federal Reserve Banks.

By – Domenic Gabriella for GovernmentBond.com

An Overview on Municipal Bonds

To maintain infrastructure is a vital necessity to governments, and can be costly to do.  This need brought about a new way to invest: investing in municipal bonds.  These bonds have less risk than other investments; one can easily check the issuing governments previous success on repaying its obligations, as well as what others who have purchased the municipal bonds thought.

Buying Municipal Bonds

The basic idea of the municipal bond is to “…to raise money for public purposes—such as building schools, highways, hospitals, sewer systems, and other special projects.”.  These bonds can be issued from states, cities, counties, and other governmental entities.  Many sales of municipal bond vary and so each must be analyzed on its own. One concern when investing in municipal bonds is the lack of information available about these bonds.  This is due to the fact that municipal bonds trade infrequently.

Tips for Buying Municipal Bonds

  1. Since each municipal bonds is unique, one should rely heavily on the credit ratings.
  2. Know who is responsible for servicing the interest payments on the municipal bonds
  3. Understand the economics of the municipal bonds
  4. Ensure that the risk is minimized as much as possible before investing

Municipal Bond Yields

Municipal bonds are issued by governments, so the odds of repayment are relatively high.  Even though municipal bonds are considered relatively conservative investments, like all investments, they municipal bonds carry risk.  Some people overlook this risk because it is a government who is indebted to them, but just like any company, a government can default on a loan.

Books on Municipal Bonds

Books on Municipal bonds are available on various websites.  One can find a listing of books and from the Library of Congress, which provides an extensive library of for reference on the topic of municipal bonds.   Other books can be found on Amazon, such as ‘Keys to Investing in Municipal Bonds (Barron’s Business Keys)’ .

Municipal bonds may not be offered by any one entity regularly, government deficits speak for the demand for money by governments. Municipal bonds can become a great investment with low risk and fair returns if one puts in enough effort to review the various opportunities they have.

By – Domenic Gabriella for GovernmentBond.com