July 1 has always been a red-letter day for municipal bond owners. That and New Year's Day are when semiannual coupons get paid, bonds mature, and bonds are called. This July 1 will be especially eventful. With municipalities scrambling to refinance debt at today's low rates, a record $10 billion in bonds will be called. Add the proceeds to another $10 billion in coupon payments and maturing bonds, and you'll see why muni investors will be sitting on a huge hoard of cash.
If you're one of them, you may be tempted to shovel your distributions back into similar securities. That's an option--but these days, it shouldn't be an automatic response. "People need to be careful about reinvesting in munis, especially now that they're being hyped as the latest and greatest investment," says Richard Wagner, president of Sharkey, Howes, Wagner & Javer, a Denver financial planner. "Their tax-free status alone isn't enough to make them a great investment."
The risk of buying now is that you'll lose money if rates go up and bond values fall. Wagner advises anyone getting a lump-sum payment from a callable bond to consider other investments, including stocks.
Not everyone shares that caution. A prevalent view on Wall Street is if you're already in munis, stay in them. After all, President Clinton is trying to raise tax rates, which makes tax-exempts more attractive. "Investors who are in munis because they wanted a high aftertax return and relatively low market volatility compared with equities should stay in munis," says George Friedlander, fixed-income strategist at Smith Barney, Harris Upham.
There is no way to replace the muni yields of the 1980s, except perhaps by buying unrated bonds, which is not advisable due to the risk of default. Bonds rated A or AA offer yields only fractions higher than AAA issues. When shopping, ask if a bond is callable, and if it is, find out the yield to the call date. Also stick with insured or prerefunded bonds, which are guaranteed to be paid.
It is possible to own munis and still hedge your bets. If you decide to reinvest, just do so defensively, says Marilyn Cohen, who manages individual bond portfolios at L&S Advisors in Los Angeles. She suggests assembling a collection of short- to intermediate-term bonds that will come due every year or two in staggered maturities--a strategy called laddering. That way, you'll always have money to reinvest in case interest rates start moving up.
IF YOUR MUNI IS CALLED... Issuer/AAA bond Matures Coupon NYS DORM. AUTH./ 2013 10.125 COLUMBIA UNIV. MASS. HEALTH & EDUC. 2003 9.625 FACIL. AUTH./MASS. GEN. HOSP. SERIES C ...BRACE FOR LOWER YIELDS METROPOLITAN 2022 5.5 TRANSIT AUTH. ORANGE/ORLANDO 2014 5.25 EXPRESSWAY DATA: J.J. KENNY CO., LEHMAN BROS.