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Muni bonds gain as treasuries falter

The Fox Valley Park District would have issued the bonds, whether there was a quirk in the market or not. But the historical oddity didn’t hurt, either. “We didn’t know how good the market would be,” Steve Messerli, executive director of the Fox Valley Park District, said. “But it definitely was an ideal time for us to save a lot of money.”

Last month, the park district, which covers Aurora, North Aurora and Montgomery, issued $8.5 million of bonds as part of its $44.5 million effort to buy land and make improvements to dozens of park facilities throughout its 65-square-mile district. But Messerli said the district was surprised to find that conditions on the bond market, coupled with the district’s solid bond rating, produced a 3.26 percent interest rate – the lowest the district ever received for a bond issue. And because the bonds are repaid from property tax revenue, the record low interest rate will save taxpayers a lot of money. “For those governments with good ratings, this is a great time to move ahead with these kind of issues,” Messerli said.

The reason for the good times is complex, yet fairly simple. “This is a great time for munis [municipal bonds],” said Dave Brady, owner of Brady Investment Counsel in Geneva. For generations, local taxing bodies such as cities, counties, school districts and park districts have issued bonds as a means of paying for large expenses, such as land purchases or construction of big ticket items such as roads, sewers, water treatment plants or public recreation facilities.

Traditionally, those municipal bonds, also known as “munis,” are backed by a promise to be repaid, with interest, through taxes or fees. To make the bonds more enticing, the federal government does not levy taxes on interest earned from municipal bonds. However, because of these tax advantages, the bonds typically offer lower yields compared with other securities, such as the 10-year U.S. Treasury Bill. But since late last year, as the dollar has waned and the credit crunch has pulled down other investment sectors, many investors have rushed to buy treasury securities, lowering their yield. At the same time, the bond market has suffered as fears surfaced that some large insurers of municipal debt, caught up in the credit crunch, might be downgraded on Wall Street. As a result, for the past few months, quality municipal bonds have yielded higher than treasury bonds, even before the yields are adjusted to include the tax exemption.

“This doesn’t happen often at all,” Brady said.

And, he said, the situation presents a unique opportunity for those issuing the municipal bonds, as well as for those seeking to buy them. “Obviously, it’s not for everybody,” Brady said. “But for taxable investors, looking for fixed income, ‘munis’ make a lot of sense right now.” Despite the problems with insurers, Brady said investors should feel confident in the security of municipal bonds, as cities and other local taxing bodies rarely, if ever, default. David Phillips, senior vice president at Speer Financial in Chicago, said municipal bonds had become an attractive alternative for many investors, particularly when weighed against the volatility of the stock market. Speer Financial specializes in helping local taxing bodies issue bonds.

“We are seeing that these conditions are good for [bond] issuers,” Phillips said, noting the low interest rates being awarded to highly rated municipal borrowers. “And the ability to have a yield that is better than treasuries is a good thing for the investor.”

Others were less enthusiastic about the state of the market. Jonathan Gripe, a financial adviser with Edward Jones in South Elgin, said bonds should be a part of almost any investor’s portfolio. And municipal bonds have garnered a lot of attention among investors recently, he said. “Clearly, eyebrows are being raised by what we’re seeing,” Gripe said. “And good munis could be a good investment.” But he said investors needed to weigh the return from a municipal bond against their goals. “It all depends on your portfolio,” Gripe said. And he and Brady warned that the good times for “munis” could be short-lived.