Tax-free municipal bonds are adding fresh appeal
Thanks to the US government, thousands of investors have learned about the value of tax-free interest. As billions of dollars of All-Savers certificates matured last October and November, investors couldn't help noticing the brokers advertising their tax-exempt municipal bonds in almost every publication in the nation.
Now, thanks again to the US government, the municipal bond brokers expect to have no trouble selling municipals. Starting this month, the government requires money market funds, brokerage houses, banks, and thrifts to withhold 10 percent of the interest investors earn on their money.
''The withholding tax in effect this month will create some demand for municipals,'' predicts Jack Merritt of Van Kampen Merritt Inc., a large issuer of insured municipal bond unit trusts.
Mr. Wendt of Nuveen, which sells municipal bonds, believes the government crackdown on ''exotic'' tax shelters may also push some investors into municipal bonds.
''Tax shelters are under the gun, especially the more esoteric ones,'' Mr. Wendt says. ''Furthermore, oil and gas shelters are not as attractive as they were with the drop in price of oil and gas. Real estate prices are stabilizing, because inflation is receding, which means you don't have an automatic appreciation of real estate.''
The municipal bond markets in 1983, however, should benefit from some other factors besides the advent of the withholding tax and the IRS action. Mr. Wendt notes that muni bonds now have yields close to or in some cases higher than government bonds - on a pretax basis. On an aftertax basis, there is no contest: municipals win hands down.
Currently, issues listed on the Bond Buyer Municipal Bond Index are yielding 9.37 percent, compared with 10.50 percent for a 20-year Treasury bill. Late last fall, munis were actually yielding more than Treasury bills. But recently this relationship has reverted to its normal ratio. Historically, a municipal bond has yielded about 90 percent of what a Treasury bill did.
These high yields have attracted investors, who last year bought $75 billion worth of municipal bonds. The buyers were not only attracted by the healthy yields, but they also hoped to make some capital gains in 1983 as the bonds appreciated in value. These expectations may well be met, says Alvan Markle, a first vice-president and director of fixed-income research at Butcher & Singer, a Philadelphia brokerage house.
Mr. Markle figures muni bond yields should drop still further, to an 8 1/2 percent level relatively soon. By year-end, he expects the bonds to be yielding 7.50 percent. This would provide current investors a 22 percent profit on their investment, not figuring in the current tax-free yield.
''That's hard to beat,'' he concludes.
One factor is that the bond calendar remains relatively light, in large part because of the huge rush of new offerings late last year. As interest rates fell, revenue-starved municipalities started to issue new bonds. At the same time, the US government, at the prompting of the Securities and Exchange Commission, decided that municipal bonds should become registered securities on Jan. 1. The SEC figured that muni bonds, which have always been issued in negotiable form (whoever held them owned them) were being used to avoid inheritance taxes and conceal money earned through running drugs. Thus, they mandated the change.
But as Mr. Merritt noted, ''This posed many problems, since many state governments had laws which did not permit them to issue registered securities.''
In addition, comments Thomas Pasquale, head of the fixed-income department at Prescott, Ball & Turben, a Cleveland-based brokerage house, this change was bound to cause technical problems in the back offices of the brokerages. Thus, the rush to issue certificates.
(Congress, noting the havoc caused by its ruling, has since deferred the law until June 30.)
An investor interested in municipal bonds should watch their credit ratings. Many communities have been hit hard by the recession.
* It's a bird. It's a plane. No its Super . . . Money Market Fund. It had to happen. The Fidelity Group, which runs several money market funds and mutual funds, has taken one of its money market funds and given it many of the characteristics of the Merrill Lynch CMA accounts.
The new account, which is called Fidelity Ultra Service Account (Fidelity USA), is the first asset management account sponsored by a mutual fund. It will combine cash management, brokerage services, and several optional services. It is sure to prompt some form of imitation among other mutual fund organizations with money market accounts.
Fidelity has decided to drop all check writing minimums for Fidelity Daily Income Trust, the money market fund on which its USA account is based. Previously, if a customer wanted to draw down on a money market account, it required writing a check for at least $500. In its new account, which requires customers to keep at least $10,000 in their accounts and pay a $3-a-month charge , Fidelity will do away with the minimum feature.
The new Fidelity account, which will be available Feb. 1, will allow customers several options. They can buy into the Fidelity Daily Income Trust, and have the benefits of the account, including writing an unlimited amount of checks, or add several optional features. These include opening up a discount brokerage account with Fidelity/Source Securities and having use of a MasterCard II debit card. In addition, customers can have their paychecks deposited directly in their accounts and have bills automatically paid.
When the Dow Jones industrial average touched the 1,100 mark last week, the market was lashed by selling. At week's end, the widely watched averaged was poised at 1,080.85, up 4.78 for the week.