Resist the bait on long-term municipal bonds

MONEY NOTES

September 12, 1993|By Knight-Ridder News Service

Now that the Clinton tax package is law, high-income investors will be flooded with offers to buy tax-free securities, especially municipal bonds.

Think twice before taking the bait, says Jay Goldinger, a Beverly Hills, Calif., money manager.

With interest rates at their lowest level in 20 years, the risks of holding long-term municipals (or mutual funds that invest in them) are very high, he said.

If interest rates start to inch up, municipal investors could see negative total returns. Investors who sell early could lose more of their principal than they received in interest payments.

Bond prices move in the opposite direction of interest rates. If interest rates move up, the market value of bonds already issued to investors falls. The opposite would happen if rates fell.

Market value only matters if a bond is sold before it matures. If held until maturity, bonds generally are redeemed for the full purchase price, regardless of market value.

But holding a bond until maturity can carry risks, too. In the early 1970s, investors who tried that strategy had to accept low yields -- 3 percent to 4 percent -- while new municipals were being issued with double-digit yields.

"Buying munis today could put you in the same leaky boat," Mr. Goldinger said.

If you must buy municipals, stick with those that mature after a few years, because interest rates have less effect on shorter-term bonds.

Visa offers how-to tips on using credit cards

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