8/14/2019 In the News: Is Time Right for Muni Bonds?

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In a world where cash is suddenly king, the impulse isto hoard it.

Find a convenient mattress, maybe a bank certificateof deposit, and salt it away for better times.

Michael J. Steppe has a different idea.

“The problems in the financial services industry aretranslating into unique opportunities for investors in

municipal bonds,” said Steppe, partner at BrookfieldInvestment Partners LLC and chief investment officerat Nicolet National Bank in Green Bay.

The wealthier you are, the more potential munis haveto give your taxable portfolio a boost.

Munis are debt obligations issued by state and localgovernments around the country. Investors don’tpay federal tax on their yields, which makes themattractive for people with high incomes.

Say you’re looking at a municipal bond with a yield of 4%. If you’re in the 28% tax bracket, it will pay you theequivalent of a 5.55% yield on an after-tax basis. Inthe 33% bracket, that after-tax yield equivalent risesto 5.97%.

 A yield of 4% on a muni with a maturity of five yearsor less isn’t hard to find these days, Steppe said.

He has typically advised buying munis when they firstcome to market to get the best price from the broker.But the credit crisis has forced many institutions tosell their munis, creating unique opportunities on the

secondary market, Steppe said.

• Many financial institutions, faced with lowerearnings, can’t get good tax advantages from munis,so they’re selling them.

• Dealer firms, loath to finance as much inventory,

aren’t buying munis and othersecurities in big quantities likethey used to.

• A number of big hedge fundsare selling munis to raise cashto meet redemptions.

The flood of quality issuescoming onto the secondary 

market has Steppe diving in.

“Now’s the time to focuson high-quality, general-obligation, non-callable munis with maturities of three to five years,” Steppe said.

He’s hesitant to buy munis with maturities of morethan five years. Municipalities are seeing theirfinancial conditions weaken as housing problemsdent tax revenue and inflation pressures rise. Thatmeans longer-term muni investors could be lockedinto a deteriorating situation where there’s a risk of credit downgrades.

If interest rates rise and the supply of new munisincreases, investors may regret that they tied up theirmoney for longer periods, Steppe said.

 All of these factors create a climate where investorsare much better off in individual issues, he said.

“This is the period where you want to avoid municipalmutual funds, especially the leveraged ones, becausefunds tend to buy longer maturities and lower-quality 

issues,” Steppe said.

In a credit-sensitive environment, those kinds of issues will underperform, he said.

Steppe focuses on two types of munis: pre-refundedand general obligation bonds.

Page 1 of 2 Is time right for muni bonds? | Milwaukee Journal Sentinel October 26, 2008

I N T H E N E W S

Is time right for muni bonds?Milwaukee Journal Sentinel October 26, 2008Investment Trends

Michael Steppe

8/14/2019 In the News: Is Time Right for Muni Bonds?

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Municipalities issue pre-refunded bonds to refinance

debt. The income normally is secured by anirrevocable trust of U.S. Treasury securities, so it’snot dependent on the issuer’s revenue stream or tax collections.

General obligation bonds are backed by the full faithand credit of the issuing municipality.

The simplest advice for would-be muni buyers is toseek out bonds from places where they’d want to live,Steppe said.

“Buy Oconomowoc, Grafton, bedroom communitieslike East Troy, Lake Geneva and West Bend, thesuburbs of Minneapolis and Chicago. If you want tolive there, it’s probably a good credit,” Steppe said.

Here are some general obligation bonds Steppe sayshe was seeing trade last week at attractive prices:

Palatine Park District, Ill., has a 5.5% coupon andmatures Dec. 1, 2013. This bond has a Aa2 creditrating from Moody’s. It is not callable and was trading at a yield of about 3.8%.

Sun Prairie, Wis., has a 4% coupon and matures April1, 2014. This bond has a Aaa rating from Moody’sbecause of insurance and the underlying credit rating for the community is Aa3. It is not callable and wastrading at a yield of about 3.8%.

St. Croix County, Wis., has a 4.25% coupon andmatures April 1, 2012. This bond has a Aa3 creditrating from Moody’s. It is not callable and was trading at a yield of 3.65%.

Page 2 of 2 Is time right for muni bonds? | Milwaukee Journal Sentinel October 26, 2008