Tax-free bonds have always been the only way to increase your income, reduce your tax bill and increase the safety of your portfolio, all in one neat little package.
But bankruptcies in Harrisburg, Detroit and a couple of small California cities, combined with the crushing effect of the $2 trillion pension and benefit liability municipalities have run up, have cast a dark shadow over what has historically been a true safe harbor for retired people.
The muni market has really had a tough ride for the past year or so. And if you’re like me, you’ve been looking for an indication that the tide has finally turned and it is safe to get back into munis again.
Well, the wait is over.
A recent ruling by a federal judge has made it possible for municipalities to cut current and future public pensions. The new ruling states that Michigan can bypass the state’s constitutional protection afforded to its public pensions. And this ruling is expected to change how other cities and states run their pensions.
This means cities, counties and states have just been given a “get out of jail free” card by the courts. They now have a way out from under the impossible pension situation that would have driven many into bankruptcy.
The effect this ruling will have on the muni market will be similar to the effect TARP had on the stock market back in early 2009. TARP was essentially the go ahead signal that the banking system would survive, and stocks have been on fire ever since.
Analysts expect this decision by the federal court to accelerate a recovery in the muni market, too. It’s 2009 all over again but this time for tax-free bonds.
The news of course is not all rosy. There is still a long way to go for many cities and states to get back on solid fiscal footing. But this essential change in the law regarding pensions has given every one a second lease on life.
Munis are again a viable option for most safety conscious investors with an above-average return. Some zero-coupon munis pay a taxable-equivalent yield, or TEY, as high as 8% to 10%.
It is time to take another look at tax-free bonds. It looks like they’re safe again.