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Portfolio > Mutual Funds > Bond Funds

Boomers - Beware stimulus bonds

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With municipal bonds receiving the lion’s share of investors’ attention of late, boomer clients might think infrastructure investments are the way to go. But the Wall Street Journal‘s Ian Salisbury warns so-called “stimulus bonds” issued as part of the administration’s economic recovery plan are better suited to giants like pension funds than individual investors.

“Unlike the vast majority of municipal bonds, Build America Bonds are taxable. Their credit isn’t backed by the federal government, but Uncle Sam subsidizes about a third of the interest or provides a tax credit to investors. The upshot is that state and local governments can sell bonds with interest rates that compete with corporate bonds at a cost that’s below what they would pay on equivalent municipal bonds.

‘We think they’re terrific,’ says Stan Richelson, an investment adviser and author of the fixed-income investing primer “Bonds.” ‘If municipalities we believe [in] come to market, they are going to be much better credits than corporate bonds.

“Individual investors have had trouble buying the new bonds, and it’s no accident. The flight amid the credit crisis of many large investors, such as hedge funds, has made the market even more reliant on them. That’s meant mom-and-pop buyers can command unusually attractive yields, but it’s put municipalities in a bind by making borrowing much more expensive.”

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