Municipal Bond Portfolio

What is a Municipal Bond?

Municipal bonds are issued by states or divisions thereof. They are debt securities with the proceeds from the issuance of the bonds used to build highways, bridges, schools, power plants, and other capital expenditures.

Municipal Bonds or “muni bonds” can be viewed as loans investors make to local governments. Most Municipal bonds are exempt from federal taxes and many state and local taxes, so they can be very attractive to high income investors. There are taxable Municipal bonds available, and muni bonds subject to AMT tax, so it is best to work with a professional to help with the process.

What are some of the Risks?

There are several risks to consider when considering muni bonds. This is by no means an exhaustive list, but includes some key risks, in our view.

The risk of default. This risk is generally lower with investment grade munis than corporate bonds.  Revenue bonds have generally more risk in economic downturns than GO (General Obligation) bonds. For example, a bond issued and backed by the taxing power of a high rated city is thought of as generally more stable than a bond issued for a sporting complex and backed by the revenue of the complex.  Most muni bonds carry a quality rating from one or more independent rating agencies, and some are insured by independent companies.

An additional risk is market price fluctuation before the bond matures.  This is typically referred to as interest rate risk. This risk is shared by all fixed income investments. If the bond is sold before maturity, and interest rates are higher for a comparable bond at the time of sale, the value of the bond would likely be less.  If interest rates for a comparable bond are lower, the value of the bond would likely increase.  The longer the maturity of the bond, the more this inverse relationship to interest rates affects the price of a bond. This risk is only applicable during the holding period, when the bond matures, the investor receives principal back.

Call risk is when a bond is called in at par value (principal returned) before it matures.  This may present the investor with lower rates of return to choose from with the proceeds from the call. Sometimes referred to as reinvestment risk.

How does Bāzis Young Investment Group manage portfolios?

We endeavor to construct portfolios to mitigate these risks listed above, and take advantage of tax-free income as well.

To mitigate the default risk, we diversify by state, we purchase “A” rated or higher bonds (investment grade bonds), and seek to build a portfolio with GO or essential service bonds whenever possible.

We avoid the purchase taxable muni bonds or bonds subject to AMT.

We ladder the maturities of the bonds from long-term to short-term to mitigate interest rate risk and liquidity risk. We typically hold to maturity and are not active traders.

We avoid purchasing bond mutual funds because they typically do not have a maturity date, and the internal management fees can be excessive, in our view. With no maturity date, if rates go up and value goes down, there is no assurance the investor will recover principal, a separate bond has a maturity date when principal is returned.

We manage portfolios on a discretionary basis. Qualification to become one of our clients is when your portfolio reaches one million dollars in investable assets.

Our fee is a simple wrap fee. It is calculated on the value of the portfolio, that’s it. We purchase bonds on an institutional level and do not act as a broker dealer, we do not charge a commission or mark-up on bonds. Mark-up and commission are difficult to ascertain with many traditional broker dealer firms because the fee is usually built into the price of the bond. We feel our simple fee structure aligns our objectives with our clients. In our view, a commission structure could incent the advisor to make frequent and potentially needless transactions because each transaction includes a commission.

Every investor has different needs and objectives. Muni bonds may or may not be right for you.  It is important to discuss your unique situation with a professional before you commit to adding muni bonds to your portfolio.  We are available at the duane@bazisyoung.com or 866-550-8012 and invite you for a complimentary, confidential discussion, at your convenience.

Contact Bāzis Young Investment Group, today to schedule an appointment.

Important Disclosure Information 

The comments above refer generally to financial markets and not Bazis Young portfolios or any related performance. Opinions expressed are current as of the date shown and are subject to change. Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. 

Information or data shown or used in this material was received from sources believed to be reliable, but accuracy is not guaranteed. 

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not consider the specific investment objectives, financial situation or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report. 

In a rising interest rate environment, the value of fixed-income securities generally declines.

Stocks represent partial ownership of a corporation. If the corporation does well, its value increases, and investors share in the appreciation. However, if it goes bankrupt, or performs poorly, investors can lose their entire initial investment (i.e., the stock price can go to zero). Bonds represent a loan made by an investor to a corporation or government. As such, the investor gets a guaranteed interest rate for a specific period of time and expects to get their original investment back at the end of that time period, along with the interest earned. Investment risk is repayment of the principal (amount invested). In the event of a bankruptcy or other corporate disruption, bonds are senior to stocks. Investors should be aware of these differences prior to investing.

Bāzis Young Investment Group, LLC (“Bāzis”), is a registered investment adviser with the Securities and Exchange Commission. Registration as an investment adviser does not imply any level of skill or expertise. Any discussion of specific securities is provided for informational purposes only and should not be deemed as investment advice or a recommendation to buy or sell any individual security mentioned.

To review other risks and more information about Bāzis, please visit the website at www.bazisyoung.com and the Form ADV, Part 2A, Part 2A Appendix which can be sent to you by request.