Safety First, Says Muni Bond Manager

1/30/2012 @ 1:12PM |75 views
Article from Forbes

Investors seeking income in the muni field should stick with general obligation and essential revenue bonds, says Bill Walsh, who manages a muni portfolio for his clients. He advises staying away from more speculative instruments.

Kate Stalter: We’re talking about municipal bonds today with Bill Walsh, of advisory firm Hennion & Walsh.

Bill, tell our listeners why you believe munis are a good investment in today’s economy, and with the volatile equities market.

Bill Walsh: Well, I think municipal bonds have proven, in this economy—and certainly with the volatility of the equity market—to be a very, very good place for people that are looking for conservative income to invest in.

I think it proves out that bonds are…I always say bonds are boring. You know, last year, I guess there were some headlines on it, and they tried to get them to be something more than what they are. But historically, if you buy high-quality bonds, you get your income every six months, and when principal comes due, you get your money back.

So it’s a pretty boring investment. But it’s certainly proved to be something worthwhile for the individual investor over the course of the last 50 or even 100 years.

Kate Stalter: You mentioned some of the headlines in the past year or so, and one thing obviously comes to mind: There were some dire predictions from some analysts about potential defaults, which did not pan out as predicted. Do you think some investors were scared off by that?

Bill Walsh: There’s no question. I think there were definitely investors who were scared off by that, which again was—I guess “silly” is the right word—but because of their fears and because of the headline fear or trying to trade the headline, created liquidations.

A lot of mutual funds had liquidations putting a lot of single-issue bonds in to the market, and the people that actually understand bonds and wanted to take advantage of it really got a tremendous value when that happened.

Kate Stalter: So it represented a buying opportunity, for those who understood?

Bill Walsh: Yeah, definitely, definitely. It was a huge buying opportunity, and enabled investors to lock in to some very, very attractive tax-free yields.

Kate Stalter: I wanted to talk a little bit, Bill, about your investment philosophy specifically. How you invest in bonds on behalf of your clients?

Bill Walsh: Well, again, we look at it very, very simply. We look at each investor and each client individually, and we want to know what’s their goal and what’s their objective.

But I would say for most of our clients, their objective is income, and they don’t want to be speculating. They don’t want to have the volatility that other investments will provide. So they want safety.

With income and safety, it’s a pretty easy process. For individual investors we always suggest they look at high-quality bonds, being like general obligation bonds, essential purpose revenue bonds, especially like a year ago when there were dire predictions.

We say, “Well alright, in a bad economy what, what pays?” Stay with high-quality, stay with essential revenue, things that need to be and will be paid and you’ll be fine.

So that’s always really been our philosophy in good times and in bad. High quality, don’t speculate with your safe money, and buy the best yield available.

Kate Stalter: Any particular holdings or even classes of holdings within the muni bond universe that stand out right now?

Bill Walsh: Again, no. I don’t know if there’s any one class at this moment.

What we suggest for the individual investor is still based on the things we were even talking about a year ago. The rates are lower on the bonds, because the supply is diminished. The demand is stronger, again, because people aren’t being scared out of them, but that’s for safety.

You know, if your goal is income, then invest for safety. If your goal is growth, then I don’t know if bonds really fall into that category. You might want to be looking at other investments.

There’s Euro coupon bonds and things of that nature, but in general, income and safety…invest for safety. Stay with general obligation bonds, which are backed by the full faith and credit of a municipality. Stay with essential-purpose revenue bonds, whether it be a water and sewer authority or a highway authority, something like that. Something that you know the revenue is there. Don’t speculate in this market.

Really, in the last couple years, the full ratio on bonds, historically, are negligible. But things that you saw that did have issues were basically these land deals and these community development districts. Stay away from those. Normally when they come out, they’re nonrated and they’re speculative and you might get a touch higher yield, but you run the risk of losing your principal dollars. So stay away from those.

High-quality sectors—GOs [general obligations] and essential purpose revenue bonds—are what I would say would be the two main types of categories.

Article from Forbes

What we worry about when we worry about Greek debt

By MATTHEW CRAFT, AP Business Writer – 3 hours ago  

NEW YORK (AP) — Remember Greece?

Article from The Associated Press

It's been two years since a financial crisis erupted in the birthplace of drama, and the final act is still unfinished. A second week of talks in Athens ended Friday with no deal between the country, the European Union and private holders of Greek bonds.

Remarkably, even after the crisis became such an international worry last year that the leaders of France and Germany were actually referred to as "Merkozy," the European debt bomb could still explode, with Greece as the fuse.

Economists and investors see a Greek default as the biggest test of the world financial system since the crisis that followed the collapse of Lehman Brothers investment house in 2008.

It is also the biggest threat to what has been a successful start to the year in the U.S. stock market. The Standard & Poor's 500 index has gained 4.7 percent, roughly half its average for a full year, in just four weeks.

"If talks break down next week and it looks like they can't reach a deal, it raises all sorts of risks," says Jeffrey Kleintop, chief market strategist at LPL Financial. "The stock market could probably lose half its gains for the year."

On paper, it's hard to see how Greece could take down financial markets in the U.S., the world's biggest economy, with $15.2 trillion in goods and services churned out every year.

Consider:

— Greece's economy weighs in at euro220 billion, according to the International Monetary Fund's estimates. That translates to $285 billion, which puts Greece's economy on par with Maryland's. The U.S. sells about $1.6 billion in weapons, medicine and other products to Greece each year, a minuscule 0.07 percent of exports.

— U.S. banks say Greece on its own poses no danger to them. Unlike European banks, they're not major lenders to Greek businesses and aren't saddled with Greek government debt. In its most recent report, JPMorgan Chase, the largest bank in the U.S., said it had just $4.5 billion at risk in Greece, Ireland and Portugal combined. That's about what the bank makes in revenue in two and a half weeks.

— Many worry that U.S. banks would struggle to cover the insurance contracts they sold on Greece's euro350 billion, or about $460 billion, in government debt. But the amount of insurance taken out on that debt totals $68 billion, according to the clearinghouse for the contracts. That's hardly enough to pull down the banking system. And the banks have offset all but $3.2 billion of those contracts with other contracts. In other words, pocket change.

"The direct impact of a Greek default is almost zero," Jamie Dimon, CEO of JPMorgan Chase, told CNBC on Thursday.

So what's everybody — well, everybody but Jamie Dimon — worried about?

A breakdown in talks could trigger steep losses in stock markets in Europe and the U.S. Just as in 2008, banks could stop lending to each other, and the credit freeze could cause a market panic.

More importantly overseas, it could cause borrowing rates for Portugal and Italy to jump, pushing those much larger countries closer to defaults of their own.

That's only the beginning. A Greek default could unleash a host of larger problems. Some are already anticipated while others are likely to blindside even the closest observers, says Nick Colas, chief market strategist at ConvergEx Group. "In any complex system, you're going to have unintended consequences," he says.

He compares it to the collapse of Lehman Brothers: Analysts saw it coming, but the fallout in still caught them by surprise. A money market mutual fund found that it couldn't redeem its customers' money. Money market funds, which many considered as safe as savings accounts, suddenly looked suspect until the Federal Reserve backed them up.

At a conference on sovereign debt this week in New York, Steve Hanke, professor of economics at Johns Hopkins University, predicted that even commodity prices would plunge in response to a messy Greek default.

If Greece goes under, traders seeking safety would immediately sell euros and buy dollars, Hanke said. The dollar would soar and prices for commodities like oil and wheat, which are bought and sold in dollars around the world, would collapse. A single dollar would buy much more oil or wheat.

"If the bomb is set off by Greece, commodity prices will collapse," Hanke said.

Hanke, who has advised governments around the world on managing their currencies, argued that Greece appears bound to collapse under its debts as its economy shrinks. "Greece is doomed," he said.

So investors will be watching what happens this week in Athens. At the sovereign debt conference, Hans Humes, president of Greylock Capital Management, said this week could bring "the precedent-setting moment." He warned that if the banks and investment funds that hold Greek bonds take steep losses, then Portugal, Italy and other countries shouldering heavy debt burdens can be expected to follow Greece's lead.

It's comparable to a messy default. Traders will respond by immediately selling government bonds from those countries, Humes said. Borrowing costs will rise, and Europe's debt crisis will turn much worse.

Humes has been involved in the negotiations on the side of creditors holding Greek bonds so he has a stake in the game. But it's a scenario other money managers often cite.

"There's a fear that other countries won't negotiate at all. They'll just say, 'We'll pay you back at 50 percent or maybe less," Kleintop says.

To Colas, the deepest concern isn't how the S&P 500 reacts or whether the dollar rises if Greece drops the European currency. It's the possibility for panic, especially a run on European banks.

What if people across France and Germany crowd into banks to pull their deposits? Banks, after all, are some of the largest buyers of government debt.

"Human emotions can drive things off the rails," Colas says.

Article from The Associated Press

Your Money: Tips on buying corporate bonds

By Erin E. Arvedlund

Inquirer Columnist

Article from philly.com

Corporate bonds are grabbing the spotlight these days as investors grow desperate for yields above rock-bottom U.S. Treasuries, which are returning just 3 percent or so annually.

We asked one reader, Karl O. Koch, to allow us to reprint his question: How does one go about buying corporate bonds?

We'll show you the ways to buy individual corporate bonds and bond funds, the pros and cons of each, and the fees to watch out for.

Retail investors can research company bonds' risk via credit ratings. The three main agencies are Standard & Poor's, Moody's, and Fitch, as well as independent credit ratings services Rapid Ratings or Egan-Jones. S&P, for instance, rates "investment grade" corporate bonds at BBB or above; below that are known as "high yield" corporates, or junk bonds.

The higher the rating, the less risk, at least in theory. But a lower rating means potentially a higher yield - since that can result in a higher cost of borrowing. Understanding the security or collateral pledged against the obligation as well as the credit quality of the underlying issuer is key.

Think of a corporate bond as an IOU, money that companies borrow from investors at a specified interest rate over a specific time period. A good place to start tracking corporate bond prices and yields is on Bloomberg's website (http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/). The FINRA/Bloomberg Active U.S. Corporate Bond Indexes are comprised of the most-often-traded corporate bonds, and these indexes can help you compare returns among them.

Investing in a high-yield corporate bond fund? Then it should have returned at least 4 percent in 2011, compared with the benchmark indexes Barclays Capital High Yield and Merrill Lynch High Yield Master II, which rose in the 4 percent to 5 percent range last year.

When examining historical performance of an individual corporate bond or fund, the most important measure is "total return," not just the amount of income the bond generates. Total return measures the amount earned by owning a security over time, incorporates the accrued interest on the bond during ownership, and coupons paid out on the bond. Total return is the most complete measure of money made.

Jeremy Brenn of Sensenig Capital Advisors in Fairview Village, Pa., says his firm mostly advises clients to buy bond funds like DFA Two-Year Global Fixed Income Portfolio (DFGFX), with a low, 0.18 percent fee annually. The fund typically keeps maturities very short and credit quality high so as not to take on undue risk. Short-term corporate bonds generally mature within three years, medium-term is up to seven years, and long-term is generally up to 30 years.

The fund's returns haven't been great recently, with one-year at 0.78 percent, 3-year returns at 1.5 percent and 5-year at 2.8 percent, but "we think of the bond side of the portfolio as a way to temper the volatility of the stock side. Therefore, we educate clients about a 'total return' approach to investing rather than focusing purely on income," as many investors do.

However, Sensenig Capital also purchases individual bonds in large-cap A-rated companies such as PepsiCo and GE Capital for clients' portfolios. They use the Vanguard Short-Term Bond ETF (symbol: BSV), which has a tiny 0.11 percent fee.

The advantage of bond mutual funds is they are more easily traded than individual bonds. Among some of the more well-known are: the iShares iBoxx High Yield Corporate Bond Fund (HYG) or the PIMCO Investment Grade Corporate Bond Index Fund (CORP). There are also fixed versus floating-rate bond fund options. Van Eck was among the first to provide an investment grade-rated, floating-rate corporate bond ETF, which offers a play on the direction of interest rates; if rates go higher, then the floating-rate bonds return more.

Guggenheim Bulletshares also offers corporate bond ETFs that vary based on bond maturities all the way out to 2017 (BSCH).

Exchange-traded funds are another option, but be aware some bond ETFs are not as tax efficient as once thought.

Remember, you can calculate the total return yourself for a mutual fund, an ETF or a corporate bond, either by contacting the fund firm, checking the fund on Morningstar, or the fund's website.

Finally, buying corporate bonds individually is an option - but retail investors may have trouble buying in small lots. Some companies let you buy directly by contacting the investor relations department. If they don't, call your discount or other brokerage firm and buy over the phone, or online via your brokerage account.

It's key to check at what price and when the bond has traded before making your purchase, to avoid getting a marked-up price. Bond traders are notorious for marking up prices to build in unnecessary commissions.

Again, FINRA's website has good recent price data (http://cxa.marketwatch.com/finra/BondCenter/). For instance, local utility company Exelon's June 2035 bonds (EXC.JL / CUSIP: 30161NAC5) yield 5.08 percent with a semi-annual coupon, according to www.finra.org/marketdata.

Article from philly.com