Muni Bond Redemption Season

June has historically marked not only the end of school and the beginning of summer, but also the annual peak in municipal bond redemptions.

This year is expected to follow the same pattern, with $37.3 billion maturing in June and $21.4 billion maturing in July. (The monthly average this year is about $20 billion.) In addition to the maturing bonds, there is also a significant amount of bonds that have been advance refunded or current refunded and are expected to be called away.

2015 Muni

The opportunity to reinvest principal is one of the big benefits of holding individual bonds, but with current rates and recent volatility, many investors and their advisors may be uncertain about how to reinvest–or even if they will want to reinvest in municipal bonds.

If you or your client have bonds coming due (maturing or pre-refunded) in the next two months, here are some thoughts to consider:

  • Changing asset allocation by using matured municipal bond proceeds to invest in another asset class will cause a shift in the overall portfolio risk profile, and should not be done unless called for by the investment plan. Generally speaking, market conditions should influence which bonds you buy–not whether or not you remain in the asset class.
  • Don’t wait for the principal to be returned to you to consider what to do. Due to the volume of principal that will be seeking reinvestment, muni bond investors may find themselves competing with each other for a limited supply of appropriate bonds. Investors in high-tax jurisdictions with a preference for in-state double-exempt bonds may find their options even more severely reduced. Consider making provisions for reinvestment in advance of your maturity date, or perhaps wait for the demand to subside. (You may wish to consider using a municipal bond ETF to maintain asset class exposure while waiting for a suitable replacement security.)
  • Pay attention to the new issue calendar for appropriate issues that will settle after the maturity date of your maturing / pre-refunded bond.

Muni Bond Redemption Season

Income Investor Perspectives

Exploring ideas of interest to the income investor

May 16, 2015

The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Investments in bonds are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. Additional information available upon request.

©2015 Patrick F. Luby

All Rights Reserved.