When to sell bond funds?

Hi Terry,

This is a question that’s been troubling me for six months, and your response will help me see my way more clearly, and for that I thank you up front.
I am partially retired (age 59) and rely heavily on the dividends generated by my closed end municipal bond funds. And I do not ever sell the shares, which in essence (I believe) limits the risk of this type of investment because I do not sell shares for additional income. They make up about 50% of my entire portfolio. I have owned them for about 20 years and until 2 years ago re-invested the dividends but no more.

PLEASE LET ME KNOW WHAT YOU THINK. Your response is invaluable.
EXAMPLES OF FUNDS I OWN: PMO; NQM, NPX, IIM, KTF
Needless to say I am concerned about the rising interest rate climate going forward.

If I do not sell shares and just rely on the dividends for income.

Here’s the million dollar question: do you think our it’s safe to keep them forever. I certainly don’t want, however, for the dividends to drop significantly (that has not happened in the 20 years I’ve owned them)

SAVAGE SAYS: OK, tough question to answer, (and I personally have a closed-end muni fund), so let me give you some perspective.

There are two ways you can lose money in a bond (any bond, corporate, govt, or municipal):? You can lose money if the company or municipality defaults. Or you can lose money if interest rates rise, which causes bond prices to fall. You don’t lose, of course, unless you sell — and take that loss.

I looked at a few of your funds, portfolios of muni bonds. Several of the funds are down aabout 6% so far this?year, reflecting fears of higher interest rates. Also, as bonds mature, some of your funds are buying more bonds which are probably yielding less. So, as a whole, the portfolio is likely paying you less interest than years ago, since interest rates have been in a long term downtrend. And fears of rising rates are offsetting the yields you?will earn?this year!

Since interest rates have been declining for 20 years, the portfolio of older, higher-yielding bonds is more attractive every year, which is why the price of the fund shares has not declined very much — yet. BUT, when interest rates rise — and they will, but I dont’ know when — the PRICE of your shares will fall. You’ll still receive your interest payments, but they won’t be as attractive as the fund will hold lower yielding bonds than the current market rate.

WHEN to sell is a huge question hanging over every aspect of the bond market.

Now, you say you don’t need the principal, just want to keep getting your interest. But will you be happy if the interest you are getting, even though tax-free, might be less than you could earn elsewhere If you truly don’ t need the principal, and will not be forced to sell fund shares when they have declined, then as long as the bonds in the funds are high quality and keep paying, you can hold on to these funds.

I just have one other concern. A 50% concentration in this one type of investment seems a bit risky for someone who is partially retired. And if you are going to sell, the time to do that is now — before rates rise further. Yes, I know that means you would put money in the bank earning almost nothing — But I do hope you have some liquidity in the balance of your wealth, so you are not forced to sell when rates rise.