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Selling a muni bond fund [ClearOnMoney]
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Selling a muni bond fund

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Investment

Selling a muni bond fund

7 Mar 2012 by Jim Fickett.

A little over a year ago there was a panicked rush out of municipal bonds, when Meredith Whitney wrongly predicted massive defaults within a year. I thought the fears were overblown – yes, state and local governments are over-committed and face major long-term adjustments, but the default rate is unlikely to rise much in the next couple years. So I took the opportunity to buy into Fidelity's Intermediate Municipal Bond Fund (FLTMX; Buying a municipal bond fund and Increasing muni bond fund position). At that time the share price was $9.96 and the yield was 3.1%.

Now the share price is not only fully recovered; it is above the pre-Whitney peak, and the yield is down to 1.6%.

Municipal bonds are now, in fact, overvalued. FLTMX has a duration of 5 years. So, in a fund where the average wait for each dollar of principal and interest is 5 years, you are compensated for the risk of rising rates only with a yield of 1.6%. To put it another way, you are being paid 1.6% per year, and facing the risk that worries over defaults, worries about inflation, or just relaxation of Fed micromanagement of the markets could cause you losses of 5% for each 1 percentage point rise in rates. That is a lot of risk without much compensation.

Assuming no big changes in the situation, I will sell on Thursday. Until the sale I won't have all the details on profit but, as the price is now $10.53 and I received an average of about 2.4% interest over 13 months, it looks like a profit of about 8%. That's not huge, but it's decent compensation for knowing enough about the muni markets to understand when the crowds have it wrong.