Tax-Free Bonds: Why Now is the Time to Buy Munis

I’ve said it before and I’ll say it again. Buy tax-free bonds – now.

• Buy them through Vanguard if you are a mutual fund investor. (The average fund company charges expenses six times higher than Vanguard’s.)
• If you are a closed-end investor, try a tax-free fund like Nuveen Insured Municipal Opportunity Fund (NYSE: NIO) trading at a 10% discount to its net asset value and yielding over 6% paid monthly.
• Or, to avoid annual expenses and have the certainty of a final value on a particular date, buy individual tax-free bonds.

But, whatever you do, buy them – now.

Tax-Free Bonds: Why It’s Time To Buy Them

So, why is now the time to buy tax-free bonds? Let me count the ways:

• Ten-year municipal bonds, while down from the historic premium they reached a few months ago, are yielding as much as 10-year Treasuries. Treasuries are taxable. Munis are not.
• Most municipal bonds are safe. Yes, a few areas – particularly in California and Alabama – are troubled. But the historical default rate on municipal bonds is just 0.3%.
• Taxes will soon be going higher. A lot higher.

Yes, I know that President Obama, when he was candidate Obama, promised a tax cut for 95% of Americans. But that was then and this is now…

In the meantime, we’ve seen the federal government:

• Ride to the rescue of General Motors and Chrysler…
• Pass a massive $787 billion economic stimulus…
• Spend hundreds of billions more to recapitalize banks…
• Bail out insurance companies…
• And “fix” the mortgage market.

Now the Obama administration is:

• Proposing the biggest changes to the health care system since the advent of Medicare in 1966.
• Planning to spend billions more to lighten our dependence on foreign oil and reduce carbon emissions.
• Now urging policy makers to rewrite the rules governing the entire U.S. financial system, spending who knows how many billions more.

As for candidate Obama’s promised tax cut, I’m reminded of the remark former Clinton aide George Stephanopolous once made to Larry King, “The President kept all the promises he intended to keep.”

The Consequences of Federal Spending & Encroachment

The consequences of all this new federal spending and encroachment into the private sector won’t be fully apparent for years to come.

But the wild fiscal imbalance is already crystal clear. Washington politicians will soon demand that you sacrifice even more of your paycheck so that they won’t have to sacrifice the near erotic charge – and high incumbency rate – they get from spending it.

This is ironic when you consider that to a large extent it was government that landed us where we are today.

Sure, the mortgage boom and housing market bust was due in part to shameless lenders, greedy borrowers, and unscrupulous Wall Street types. But who set the stage for them?

• Who took short-term rates to the cellar, creating a massive incentive for consumers and investors to borrow?
• Who gave real estate investors a $500,000 tax exemption on their profits from flipping houses every two years?
• Who passed laws criminalizing banks’ failure to lend to subprime borrowers?
• Who set up quasi-government institutions Fannie and Freddie – or, as I prefer, Phoney and Fraudy – to warehouse those bad mortgages, leaving taxpayers to pick up the tab?

The answer? The federal government.

As The Free Market System “Fails”…

And what will we get as a result of this supposed “failure” of the free market system? More federal government.

I’m not sure whether to laugh or cry. But I am sure our Founding Fathers must be spinning in their graves.

• Thomas Jefferson said, “That government is best which governs least.”
• George Washington said, “Government is not reason, it is not eloquence, it is force.”

No wonder polls show that more than 60% of Americans are skeptical of increased government intervention in the economy.

They suddenly recognize that we’re in for a lot more government, a lot more “market failure”… and a lot more taxes.

Sadly, there isn’t much you can do about it… except buy munis now.

Good investing

Alexander Green
Investment U