January 19, 2008 - (Updated 08/01/08)
The way the markets have whipsawed stocks these last few months, whether large or small, in one sector or another, there have been very few ways for an investor to make money. So what's an investor to do? One area particularly attractive right now is the area of tax-free municipal bonds. When you can effectively buy a dollar for less than a dollar (a discount) knowing that eventually someone is willing to give you back a dollar, that's making money! And if you can earn some interest Federal tax-free, then not only are you earning money on your money, you're also having the opportunity to see some capital appreciation!
With the Fed broadcasting its intention to get serious and lower interest rates further, bonds typically in a lowering interest rate environment go up while in a rising rate environment they go down. That's the time to consider moving into other investments.
Muni bonds are pretty simple to understand. For example, when states need to build new roads or bridges, etc. they issues municipal bonds to raise the funds they need. Big investors buy the bonds, in effect lending the states the money, and these investors in turn get paid through the revenues they receive from tolls or taxes.
In addition the U.S. government gives investors an additional benefit, they don't have to pay income taxes on the interest they earn on their bonds. If muni bonds pay 5%, pre-tax that's the equivalent to 7% or more! These bonds also don't fluctuate very much in price.
Since I in particular focus on closed-end funds, you know now that these kind of funds can trade either at a discount or a premium. Currently, the funds I looked at are priced at an 8-11% discount. Bond prices have come down in part because bond insurers have gotten caught up into insuring subprime bonds. Now some of these insurers are in trouble. But the default rate on municipal bonds is miniscule.
Currently, tax-free bonds are yielding as much as taxable Treasury bonds!!! Something here does not compute. So we now have the opportunity to earn 5% Federal tax-free and if the Fed follows through on its stated intent to do whatever it takes to boost the economy (meaning lower rates), we have the opportunity to see some capital appreciation. In addition we can buy these bonds at a healthy discount which the market will eventually see to it that the discount narrows.
The funds that I suggest you take a look at (and determine if they are suitable for some of your money) are listed in the table below. These are in addition to the original ones that I selected last summer which are listed below these. You can find more information on each at www.etfconnect.com. All are subject to the AMT if that is a concern of yours.
The month of February was particluarly cruel to municipal bonds. The concern about whether the bond issuers ratings would be downgraded by Moody's and others weighed heavily on bonds across the board. While I believe that this makes muni bonds particularly attractive, more downside pressure on prices may continue. It appears as I write today, that the unknowns may be cleared up shortly and muni bonds will once more return to favor.
| Symbol |
Fund
Name |
Price
01/19/08 |
Div/
Share(M) |
Discount |
Yield |
Price
08/01/08 |
Dividends
Since
01/19/08
(6 Mos.) |
| |
|
|
|
|
|
|
|
| NIO |
Nuveen Insured
Muni Oppty Fund
(100% AAA rated) |
$13.73 |
$.058 |
(-10.50%)
(-9.98%) |
5.07%
(5.51%) |
$12.63 |
$.348 |
| |
|
|
|
|
|
|
|
| NMO |
Nuveen Muni
Market Oppty
Fund (80% AAA) |
$13.74 |
$.0605 |
(-8.16%)
(-9.99%) |
5.28%
(5.88%) |
$12.35 |
$.363 |
| |
|
|
|
|
|
|
|
| NPP |
Nuveen
Performance Plus
Muni Fund
(78% AAA rated) |
$13.74 |
$.0575 |
(-11.13%)
(-12.21%) |
5.02%
(5.48%) |
$12.58 |
$.345 |
| |
|
|
|
|
|
|
|
| NQU |
Nuveen Quality
Income Muni Fund
(79% AAA rated) |
$14.03 |
$.0605 |
(-7.64%)
(-7.38%) |
5.17%
(5.51%) |
$13.18 |
$.363 |
|
UPDATED - 08/01/08
Below are ten tax-free funds that can all be purchased at a discount. An equal
amount of $ placed in each fund would provide a return of about 4.91%
and have an average discount of 5.01% (as of 08/01/08). On a taxable basis,
that would be the equivalent of up to 7.0% pre-tax.
Check at www.cefa.com or www.etfconnect.com make sure the fund is still
available at a discount or a very small premium when and if you decide to purchase.
Print out this page for easier viewing.
Never pay a large premium for a fund. The funds below may be subject to the
AMT. They contain INSURED bonds, bought at a discount.
| SYMBOL |
Fund Name |
Discount
08/01/08 |
Yield
08/01/08 |
|
|
|
|
|
|
IMS
|
Morgan Stanley
Insured Municipal
Securities
|
-5.37%
|
4.86%
|
|
NMI
|
Nuveen Municipal
Income Fund
|
.48%
|
4.86%
|
|
BMT
|
BlackRock Insured
Municipal Term
Trust
|
-3.37%
|
3.63%
|
|
NUV
|
Nuveen Municipal
Value Fund
|
2.84%
|
4.78%
|
|
MUE
|
BlackRock MuniHoldings
Insured Fund II, Inc.
|
-11.99%
|
5.31%
|
Funds below are designed by the fund company to avoid AMT.
| SYMBOL |
Fund Name |
Discount
08/01/08 |
Yield
08/01/08 |
|
NEA
|
Nuveen Insured Tax-Free Advantage Fund
|
-8.13%
|
5.50%
|
| NGX |
Nuveen Insured Massachusetts
Tax-Free
Advantage Muni
Fund
|
-3.59%
|
4.87%
|
|
NKX
|
Nuveen Insured
California
Tax-Free
Advantage Muni
Fund
|
-5.14%
|
5.33%
|
|
NWF
|
Nuveen Insured Florida Tax- Free Advantage
|
-12.14%
|
5.11%
|
|
NRK
|
Nuveen Insured Tax- Free New York Fund
|
-4.38%
|
4.83%
|
|
|