These are Streange Times We Are Living In
By Brad Thomason CPA
2/27/2015
Back at the beginning of the month there was an article about Municipal Bonds in Fortune. The theme of the article was that low fuel prices would spur more travel, so the class of municipal bonds known as revenue bonds would flourish. That’s because many of them are paid for from the proceeds of toll roads, airports, and the like. I think the article was offered within the context of a larger theme of “what will these low oil prices impact?”
As per standard, they went out and found a muni expert to get a quote for the article. The guy said that munis were his firm’s “strongest conviction overweight call for 2015.” The article then went on to explain that the yield on triple-A rated 30 year muni is sitting at 2.7%.
Really? A yield of 2.7% is the thing in the entire world of finance about which you are most excited?
I don’t write this blog to have an outlet for making fun of other people. But this whole site is an outgrowth of our desire to address the fact that information about traditional investment choices is often terribly biased (and the fact that information about alternative choices is often way too scarce). As a result, I just can’t not comment on something like that.
You have to understand that we are in ongoing contact with folks from all around the country who work in the various alternative spaces. In addition to the work we do for our individual clients, we handle back-office duties for a couple of ongoing investment projects and provide sourcing services for external investor groups, family offices and folks like that. There is literally not a single week that goes by that we aren’t hearing about what’s out there, and often doing assessment on pending acquisitions.
So we see the rental deals with cap rates in the 9%-12% range. We see the 10% tax lien deals. We refer clients to insurers who are offering 6% income riders on annuity balances. We see distressed debt deals which run from the mid teens on up. We see flat immediate annuities paying more than bonds, and without any risk of devaluation (which is what is going to happen to practically every bond out there if general interest rates start shooting up)
Why would you build a portfolio out of bonds paying 2% or 3% when you could build a portfolio out of this other stuff?
When we do planning work for individuals and families, we make a big deal out of remembering to account for inflation. We often run 30 or 40 year projections, and over those kinds of periods if you haven’t accounted for inflation, your results are less than worthless: they’re dangerously wrong because they paint a picture which will be impossible to achieve. Why am I mentioning that here? Because the 2% to 3% that bonds offer right now wouldn’t even cover inflation in some of our scenarios (some of our models assume 4%, since medical expenses make up a higher portion of a retired persons spending, and those kinds of expenses often rise faster than general consumer goods). Forget about yield, it’s not even covering the yearly creep.
OK, end of rant. I can’t wrap my head around why 2.7% munis are exciting, but maybe I just don’t get it. Maybe it makes sense to you. Then again, maybe we are just living in crazy times.