Newspaper article The Christian Science Monitor

Municipal Bonds Win Attention as Short-Term Rates Fall

Newspaper article The Christian Science Monitor

Municipal Bonds Win Attention as Short-Term Rates Fall

Article excerpt

NORMAN LIND - who manages the Spartan Municipal Income Portfolio in Boston - got some unexpected help late last week when the Federal Reserve Board slashed its key discount rate from 3.5 percent to 3 percent. Fixed-income investors eager to maximize returns are now likely to focus on long-term bonds more than ever, given the decline in short-term rates.

Bond prices shot up immediately after the Fed's announcement Thursday. For instance, 30-year Treasury bonds rose $14.06 on $1,000 of value.

Mr. Lind says that with low inflation and relatively low rates of return on competing investments such as money market accounts, bank certificates of deposit, and stocks, "long bonds look like a very reasonable buy."

But that's not the only reason for the widespread perception here that municipal bonds should do well in the months ahead: Throughout the United States, many states and municipalities are struggling to reduce budget deficits. Many states are either turning to higher taxes or are expected to do so. That trend should make tax-exempt municipal bonds more attractive, experts say.

Moreover, some $6 billion to $10 billion worth of municipal bonds either came to maturity or were called for redemption on July 1; another $5 billion to $7 billion worth of bonds may be called for redemption by the end of September. And many of the proceeds from these redemptions are expected to be reinvested in new municipal bond issues.

Municipal bonds are issued by states, cities, counties, and other local government agencies. These investments are among the few tax shelters left for small investors, following Washington's closing of tax loopholes since the mid-1980s.

Roughly 75 percent of the $1.08 trillion in outstanding municipal bonds are now held by individual investors and mutual funds. Many bonds purchased in the early 1980s - when inflation was scooting along at a higher clip than now - had yields of 12 to 16 percent. Today, yields are running around 6 percent. The Spartan Municipal Income fund, for example, has a yield of 6. …

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