High California tax free income with extra protection that many Californians currently like, and hopefully won't ever need.
We have developed a process for our clients to review, select, purchase and monitor California municipal bonds. Enclosed is our review along with support as to why we believe it makes sense with our corporate bond clients' portfolios. We reviewed over 1,600 separate State of California municipal bond "for sale" listings to find what, we believe, currently is the best CA municipal bond for Investors. The following includes our selection criteria.
Step 1. Yield curve
Step 2. Extra protection
Step 3. Tax free income
Step 4. Yield premium
Yield Curve at 4-7 Years Out
We went out on the yield curve just enough to receive higher returns in yield but not far enough that if inflation starts to increase, a small but also real probability due to our country's largest deficit spending, it could lead to a loss of principle. To protect our client in this worst case scenario, we would just plan to hold to maturity.
We like sewer and water bonds, because they often have higher yields in addition to the following:
A. This is one of our most essential services, and often one of the last that families and companies could not do without.
B. California is in a high-end community, which is still demonstrating growth and tremendous wealth.
C. Water revenue has its own income sources, and are usually profitable as they pay for additional government services.
D. If the services fail, there is belief that other national governments would support them (but, of course, no guarantee).
E. Since buying these sewer and water bonds for over 20 years, Durig Capital has never seen a default.
F. These bonds are AGMC insured.
G. These bonds have superb ratings (Aa3/ AAA).
H. In some cities, such services have been privately run. In a worst case scenario, the California water system or, better yet, parts of it could be sold to pay off part of the department service.
California State and Federal Tax Free Income
We selected the State of California Dept. of Water Resources as the best California Municipal Bond we could identify for February 19, 2010.
Here are two points to consider:
A. California's State/Local Tax Burden Above National Average estimated at 10.5% of income.
B. Top national income tax rates are at 35% currently and, due to new legislation, might go up.
The corresponding 7 year Treasury currently has a 3.11% yield. The State of California Dept. of Water Resources, being both state and federally tax free, gives this 2.665% a comparable 3.75% yield to the top tax bracket, or a 0.64% pick-up.
A good 2.665% yield for a 7 year bond, even with very high ratings and with the attributes listed above, I believe, is well situated for high wealth California investors. We provided a wide list of California municipal bonds currently for sale to help compare values
Ratings Aa3/ AAA
Yield to Maturity 2.665%
Yield to Call 2.665%
Disclosure: Durig Capital has no ownership in State of California Dept. of Water Resources, Series A.