How long should you hold long-term muni bonds?

July 18, 2013 7:00 PM

How long will it take for medium/long-term municipal bonds to recover from inevitably increasing interest rates? For instance, taking into account the interest payments what is the timeframe necessary to hold longer term municipal bonds before you break even from increasing interest rates? Relatives of mine are invested in FHIGX and I know that as rates increase the face value of their bond portfolio will decrease but when is the expected break-even based on a historical average of say 5% short-term rates? Thank you for your help with this question.
posted by gibbsjd77 to Work & Money (10 answers total)

It's my understanding that the duration of the bond or bond fund is the number you're looking for. Fidelity is showing the duration of FHIGX as 8 years right now. As long as your relatives are planning to hold the fund for more than 8 years, they can be indifferent to changes in interest rates. This strategy is called bond immunization.
posted by Durin's Bane at 7:26 PM on July 18, 2013

Response by poster: What level of volatility can be expected during that eight year time-frame due to increased rates?
posted by gibbsjd77 at 7:49 PM on July 18, 2013

your questions really doesn't make sense. for one thing, if i knew what interest rates would do in the future i'd be too busy spending my trillions of dollars to answer your question. second, yes, the market value of a bond will go down as interest rates go up, but unless you actually sell it those losses are unrealized.
posted by cupcake1337 at 9:36 PM on July 18, 2013 [1 favorite]

Tangential to your question, but I think highly HIGHLY important, is the fact that you should under almost no condition be investing in muni bonds. Most cities and states are having fiscal woes right now and may not be able to pay them back. (Illinois has $80 billion in pension obligations outstanding and Californias unfunded liabilities are approaching a trillion dollars - heck Detroit went bankrupt today!) They are some of the worst investments you can make right now. If you want a safe, don't think about it investment, buy a portfolio of F500 bonds or invest in a broad based indexed stock portfolio. But Muni bonds are very much not a safe investment right now.
posted by ishrinkmajeans at 10:54 PM on July 18, 2013

I don't think immunization works here? Right because it isn't a single stable pool of bonds but rather an actively managed portfolio. Presumably they aren't going to begin allowing the duration to slowly decline- they'll probably manage the fund to keep duration about the same so Durin's Bane's answer while correct for a held to maturity portfolio doesn't apply here.
posted by JPD at 3:27 AM on July 19, 2013

what JPD said. this is a rolling portfolio of bonds, so it'll always have the duration issue and interest rate risk.
posted by jpe at 3:53 AM on July 19, 2013

I am not a financial advisor, but I also don't think ishrinkmajeans is, either.

Such absolutes in investing is always bad advice. There are many times particular instruments are good investments for some, and bad for others - based on age, strategy, goals, money invested, local and global conditions...

Muni's, in general are typically your safest bet if you pick the right ones (note, I'm not saying munis are safe investments always, but saying they 'are very much not a safe investment' is wrong). And a good portfolio will take that into account. You're looking at low, consistent returns.

If one muni fund is paying at multiples over another, chances are they are investing in junk, and jeans may be right. But the tax-free nature, and general safeness over other more volatile instruments (broad based stock portfolio - really?) ends up being a good place fore more senior folks who are looking at preserving capital versus looking to make money.

Note - not all munis are tax-free. That you need to verify with a financial advisor as well.

Since this is a fund, not individual munis you are in control of, you need to contact a financial advisor that can explain how the fund is operated - if they hold to maturity or not, etc.

Your question can be applied to practically any fund, but requires more information, since inflation is a moving target, funds have different return schemes (income vs fixed interest versus variable rate or combinations) and pure face value, especially in bonds and what your strategy may be, does not determine value.

At some points, having a negative interest rate can actually protect you from losing more money due to interest rate changes in the other direction. But I digress.

Go see a financial advisor.
posted by rich at 5:28 AM on July 19, 2013

well treasuries are your safest investment to be correct, and the appropriateness of Munis is somewhat a function of your marginal tax rate.

While I agree re: the uncertainty towards overly bearish forecasts for municipal finances - especially as the first person who puts one forth who understands how rates impact pension accounting will be the first bear who gets that, I do think you don't have much of a margin of safety buying fixed income securities at multi-generational lows in interest rates.
posted by JPD at 6:27 AM on July 19, 2013

Yes, please go see a financial advisor. Although I must say, a quick glance at the 13 yr history of FHIGX shows a fluctuation of about a dollar or two per share; not exactly a financial meltdown.
posted by freakazoid at 11:45 AM on July 19, 2013

Response by poster: Thank you for all of these answers. Have a great day.
posted by gibbsjd77 at 8:03 AM on July 20, 2013