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The events in the fixed income markets of the past several months may have left many municipal bond investors concerned, if not confused, about what to think and how to react. Over the long term we could potentially be looking at higher interest rates as the new normal. With that in mind, I want to begin a discussion about ways one could seek to recalibrate a municipal bond investment strategy in the current investment reality.
Authored by James Colby
On August 26, 2013, Barron's trumpeted on its cover page, "Puerto Rico in Trouble". This article by Andrew Bary may be a loud timpani roll for those who own the debt of the Commonwealth either directly or indirectly. But I do not agree that it offers the thunderous crescendo that seems the intent of the author.
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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
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