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Monday, April 27, 2009

General Obligation Bonds Are Safe Says Bob Brinker

Bob Brinker gets a lot of calls about how to invest fixed income. If you are not in a high tax bracket, Brinker usually recommends Vanguard's GNMA fund, VFIIX (Charts).

If you are in a high tax bracket, then Bob Brinker recommends general obligation (GO) bonds of states rather than municipal bonds of cities and sewer districts. Brinker said he has a hard time believing that US government will let any state go bankrupt, especially a very large state like California.

In the past, Bob Brinker has recommended California's General Obligation bonds and has said in past shows he still held them.

California, the state I live in, currently has the worst credit rating of all the states due to our huge spending habit, billions of deficit and billions of debt despite a 9.3% income tax and 9.25% sales tax in my county. (I also pay nearly $10,000 a year in property tax for a 4b/2b home on 1/4 acre.)
Bob qualified this by saying he does not believe the US Government will let New York City go bankrupt after the 9/11 attack so it sounds like he may own some of those bonds.

I think there is a bit of spin in Brinker's answer. In the past, he said he would not own general obligation bonds from the state of Louisiana because it had the lowest credit rating of all 50 states. Now that California has a lower credit rating, Brinker probably finds it "easier" to change his advice than admit he might have been wrong about California GO bonds.

Brinker Could be Wrong

I think Brinker could be wrong about the government not letting California go bankrupt. California mostly votes the democratic ticket.

When George Bush was president and we got into trouble with Enron manipulating our rates, Bush left us hanging in the wind. Currently the Democrats control the house, senate and White House, but this could change.

I believe if the US government swings back to the right, perhaps if Obama's plans fail and ignite huge inflation with high unemployment. If we swing to the far right, then the GOP will take over government again. A GOP government would look upon a bankrupt California as proof out-of-control spending and massive taxes are the path to ruin. So, maybe CA GOs are safe as long as they mature before the next presidential election and be wary should the democrats lose the house and senate again.

This article from Smart Money seems to agree with me.
It says GOs are safe if you
  • keep the terms short
  • diversify and
  • keep an eye on the credit ratings of the issuing states (similar to Brinker's old advice to avoid Louisiana due to its poor credit rating.)
Disclaimer: I sold my CA GO bonds (in my personal account, I use index funds in my newsletter portfolios) at the first sign of California budget trouble last year and got out at par less a tiny amount for a commission.

More Information:


  1. I'm not sure Brinker's fixed income advice is any better of late than his stock market timing advice.

    The following is an excerpt from a comment on Honey's Bob Brinker Beehive BuzzBrinker didn't post his 2008 performance numbers on his Marketimer website, and "Brinker" didn't post his 2008 performance numbers on his website.

    That is where Hulbert's Financial Digest came in handy. Here are the numbers calculated by Kirk Lindstrom:

    BRINKER’S FIXED INCOME ADVISOR numbers for 2008:"Mark Hulbert says Brinker's "Fixed income only" portfolio in Marketimer lost 2.1% last year.

    Mark Hulbert says Brinker's "fixed income advisor" model portfolio #1 lost 21.7% last year.

    Mark Hulbert says Brinker's "fixed income advisor" model portfolio #2 lost 11.5% last year.

    Mark Hulbert says Brinker's "fixed income advisor" model portfolio #3 lost 5.2% last year.
    I repeat, the Total Bond Index Fund at Vanguard made 5.1% last year.

    ALL FOUR of Brinker's fixed income ONLY portfolios for ALL your money (not just a high risk part) lost money in an up year for fixed income."
    There is some debate over how much influence the radio show host has on the newsletter published by his son of the same name. It is interesting that all their fixed income portfolios lost money in a year the total bond market was up over 5% and the GNMA fund at Vanguard was up about 7%.

  2. There is no provision in the State Constitution for Ca to go bankrupt. ONly for them to make good ont he Bonds by raising taxes. If they do go bankrupt, I have already picked out a few State Parks that I would like to own.


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