Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 10. MUNICIPAL BONDS

WHEN IT COMES to tax-advantaged investments, it's hard to beat municipal bonds, or munis, as they're popularly called. The American public, particularly those in income tax brackets over 25 percent, has been quick to capitalize on these investments, so much so that the municipal bond sector is the only bond category in which individuals, as opposed to institutions, exert a significant force. However, their strength has been diluted by the activities of hedge funds and arbitrage accounts that have been attracted to the market by the comparatively steep yield curve.^[49] It's interesting to note that European institutional investors now see the value of U.S. municipal bonds and are vigorous participants in this $2.1 trillion market.^[50] In 2006, munis outperformed taxable bonds. "Not only were the absolute returns strong, but on a risk-adjusted and tax-adjusted basis, they are compelling,"^[51] says Paul Disdier, director of municipal securities at Dreyfus.

Munis: The Opaque Market

Despite their popularity and significant tax advantages, municipal bonds remain a mystery to most people. In large part, this is because munis encompass such a broad universe of bonds of varying quality and returns. In other words, if you've seen one muni, you haven't seen them all.

Our goal in this chapter is to render any seemingly mysterious features both intelligible and manageable for investors. We have been buying and selling many millions of dollars worth of munis for our own ...