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Sunday, January 23, 2011

Bob Brinker's Municipal Bond Advice

This weekend Bob Brinker started out talking about the mess many of the states of the US are in. He called the politicians in Sacramento, California's capital, dysfunctional.  I agree.  To get elected, the politicians in California gave outrageously excessive pension promises to public unions in exchange for endorsements.

Brinker named the eleven states with triple A  (AAA) credit ratings for their general obligation bonds. The eleven states are
  1. Delaware
  2. Indiana
  3. Maryland
  4. Missouri
  5. Utah
  6. Florida
  7. Iowa
  8. Minnesota
  9. North Carolina
  10. Georgia
  11. Virginia.
Bottom Line according to Brinker:
"If you are looking at any of those eleven triple A rated states, then you are looking at good paper."
Brinker said states with AA ratings "can be held in a portfolio" if they maintain those ratings. He said he would not worry about owning any of these and he personally owns GO bonds from Virginia and Georgia.

Brinker recommends staying away from these six states:
  1. Arizona
  2. California
  3. Illinois
  4. Louisiana
  5. New York
  6. New Jersey,
  • "I would avoid.  I would not purchase in terms of their municipal securities."
Of the double A (AA) rated GO bonds, Brinker said, 
"Generally speaking" of the other 33 states "you are probably OK."
Note, if your money is in a retirement account such as at Vanguard, then the tax savings of Muni bonds do you no good.  

If you have significant funds in a retirement account at Vanguard's prime money fund and don't want to move to another institution (such as mysuggestion to use American Express Savings paying 1.3% APY  in my newsletter), then  I suggest making a ladder of CDs with Vanguard's CD Ladder tool.  Divide the funds into 5 buckets.  Keep 1 bucket (20%) in Prime money fund ready for any buying opportunities (such as a 10% market correction) or potential rebalancing, then put the remaining 80% into CDs for 3, 6, 9 and 12 months.  As the 3,6 and 9 month CDs mature, buy a new 1-YR CD.  After 9 months, you will have four one year CDs with one maturing every quarter.  When interest rates normalize, you can put the CD funds that mature into the total bond fund again. 

You can get an idea what different banks are paying for CDs and savings accounts for various amounts by using the rate tool here.  I use American Express in my newsletters because it is available to everyone and it is "too big to fail."  It is also
simple to calculate returns each month for American Express since there are no restrictions to complicate the calculation.   

You can often find better deals with more restrictions such as the 1.3% at Capital One plus 10% bonus and up to $60 credit detailed here, but you have to be a member of Costco.  If you are not a member of Costco, CapitalOne Bank is advertising 1.25% plus a 10% bonus.

Bob's Guest was Perry Mehrling, author of The New Lombard Street: How the Fed Became the Dealer of Last Resort

Perry Mehrling


    1. Honeybee, you are an invaluable asset: You prove over and over again that Bob Brinker is not nearly clear, correct and prudent enough, "and you can take that to the bank," Honeybee. :)

    2. I agree with "Anonymous" that Honeybee is an "invaluable asset" for keeping track of Bob Brinker.

      She will post a summary of today's show later today here.

      In case there is any confusion, I, Kirk Lindstrom, wrote the above article about what Brinker said about municipal bonds this weekend.

    3. Who in retirement wants to give up time on the golf course or windsurfing beach to check which states might default on their bonds?

      Here is a good article from the Wall Street Journal State Bankruptcy Is a Bad Idea

      Note from the article, the the two states that prohibit collective bargaining FOR ALL PUBLIC workers are on Brinker's list of states with AAA credit ratings.

      At least 18 states already outlaw collective bargaining with some categories of government employees; Virginia and North Carolina prohibit it for all public workers. Two newly elected Republican governors, Scott Walker in Wisconsin and John Kasich in Ohio, have threatened to dismantle their state bargaining statutes if unions fail to make concessions.

      I've been leary of Muni bonds for a long time now. I sold the last of mine some time ago. Once Obama went after GM bond holders and called them "greedy" while giving money due them to the GM unions... it seems he could do the same for the states... so the "rule of law" no longer applied to the bond market and I wanted no part of it.

      It's more likely that a state like California would pursue bankruptcy if powerful unions and other budget-dependent interest groups saw this as a way to deflect some of the pain to bondholders. California is one of the states that constitutionally guarantees its general obligation debt, and whose bondholders are now seemingly untouchable. That could change with a bankruptcy option.

      That is states like CA ruled by powerful government employee unions could force bankruptcy rather than make concessions.

      Who wants to worry about this while in retirement? I'll take my risk in the equity market and keep my fixed income safe. Thus I avoid munis completely... of course, it is easy for me to say this because I don't need the income. I can afford to be safe with my fixed income in FDIC insured accounts or Treasury Bonds like TIPS. Currently the best deal is at Capital One Bank where you can get 1.25% plus a 10% bonus. For more safe investments (less risk is less reward) See:

      => Savings Accounts Paying Over 1.0%

      => About TIPS

      => Series I Bonds Explained


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