What a Late Night in France Taught Me About the Bond Market

Tuesday night, at the close of our editorial meeting at a gorgeous chateau in rural France, we opened up a few bottles of Medoc and relaxed in the library.

The meetings were inspiring. Great ideas were flowing just as quickly as the wine. We ate some amazing meals made for us by Pierre and Chantal, and spent most evenings out on the lawn in the setting sun. In Courtomer, it doesn’t set until 10:30.

At the end of the evening, though, a few of us sat down and started talking. Nothing was out of bounds: What we thought of the Israeli-Palestinian situation after President Obama called for Israel to return to the 1967 borders… what kids today think of society… and what people are missing in the bond market.

I was sitting across from Joey McBrennan, co-editor of Taipan Daily. Joey is an expert when it comes to bond investing, and he’s been saying the same thing we’ve been saying here at Smart Investing Daily.

Long-term U.S. government bonds are one of the worst places to put your money.

But Joey was quick to say that most investors think that all bonds are the same. This is not true. A three- or four-year bond from a small city that pays its bills is not the same as a 10- or 30-year Treasury bond from the U.S. government, with rates falling like mad.

From our conversation, I picked three key factors for investors to keep in mind when it comes to looking at bonds.

Shorter Is Better

Right now, the U.S. dollar is still under fire. The Federal Reserve’s plan of printing money and keeping interest rates low is putting pressure on prices. Americans are paying more for things like eggs and milk and bread.

This is inflation… and it’s growing.

Inflation eats away at your money, making it worth less. It’s like termites… Sometimes you don’t even notice termites until your house starts to crumble. But they’ve been there, munching away right under your nose.

When it comes to bonds, shorter terms are better right now. A term under five years, for example. Shorter terms sometimes mean less exposure to inflation.

Pick “Necessities” Bonds

Now, Joey knows that there are a lot of choices in the municipal bond market. Not all bonds should be placed in the same basket. Some are more attractive (with lower risk) than others because they deal with municipal necessities.

Things like water and sewer bonds fall into this category. For most citizens, buying water and using sewage services is an obligation. This money goes to the city or town. That’s why these types of bonds have lower risk. People have to pay their water bill.

It was getting late at the chateau, and Joey was on a roll. “People need their water,” he said. It’s a simple yet very true statement. Water is a necessity, and bonds for water and sewers can offer good yields.

Find Small Communities

But again, not all municipal bonds are equal, because not all municipalities are equal. The amount of money a big city needs to raise for projects is completely different from a small community. And smaller communities might have an easier time of paying investors back.

Smaller towns have a better track record of paying their bills on time. This might be because they’re not chained to big pension funds or other money-draining obligations. Joey thinks these small communities feel more of a commitment to their residents.

“They treat their budgets like responsible elected officials that care about their neighbors,” he said.

There could be thousands of these kinds of towns looking for investors to buy their bonds.

Buy Bonds, Don’t Buy Bonds

The article I wrote on Monday last week told you not to buy bonds… Specifically, long-term government bonds.

But even experts tend to lump all types of bonds together, and investors might be missing some opportunities for safe investments. These opportunities can be found in the short-term municipal bond market.

Bonds that deal with necessities like water, that are a five-year term or less, and that come from small, responsible communities could give you a lot of safety for your portfolio.

Editor’s Note: Buying municipal bonds isn’t the only way to escape the inflation pressures facing the bond market. The key is to find investments that thrive with inflation. Joey’s municipal bond argument is great for protecting your portfolio, and the tax benefits are really great, but finding opportunities to grow your wealth as inflation climbs is a powerful chance at true safety.

Here’s a detailed letter that can show you the difference between safe investments and investments that thrive.

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