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Comment by ktavera | Hacker News Reader

AA+ rated municipal bonds can have great rates of return, low risk and usually the capital gains are tax-exempt. You can purchase bonds through online brokers (I use TD Ameritrade). There of course are other bonds; corporate, treasury and CD's you can set up in bond ladders to generate income and reinvest after maturity into another bond but those are generally subject to standard tax rates.

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I would caution against bonds, especially US Mutual bonds, right now. It's a common belief (which of course, could be wrong), that interest rates have to rise in the next few years, which would greatly decrease the price of these bonds, resulting in losses. Also, many munis (and therefore their bonds) have outstanding debts through pensions or overspending that makes repayment dicey at best. Even the AA+ rated ones - don't forget, S&P rated all the mortgage bonds at AA+ as well, and look how those turned out.

You are correct that bond values will fall if interest rates rise, but bond prices are inversely correlated with stock prices, so they are a great way to diversify risk and maximize return.

Not true at all! Over the past 85 years, the correlation between stocks and bonds has ranged from -93% to +85%, with an average of 10% and a standard deviation of 40%! That indicates they are only very slightly correlated, and not enough to create a general rule.

http://media.pimco.com/Documents/PIMCO_Quantitative_Research...

Thanks for sharing that.

However, that paper only looked at the correlation between the S&P500 and long-term treasuries. A well diversified portfolio should have a mix of bonds including commercial bonds.

The disclaimer in the paper points this out: Bonds are represented by long treasuries (Ibbston) which should not be interpreted as a full sample representative of the bond market. Different asset class proxies will have different results.

The data that I've seen on stock-bond correlation shows a pretty consistent negative correlation over the 1927-2010 time period. It's not perfect, I admit, but it serves you well when you're trying to minimize risk.

I've also heard the saying "in a panic, all correlations move to 1". Basically, when the market goes down like in 2008, everything goes down.

I don't think you can compare MBS ratings with municipal bond ratings. Mortgage backed securities were a derivative of a pool of bundled bad loans, meaning the underlying asset was toxic.

Municipal bonds are not really derivatives, there is no underlying asset that backs it except for the repayment history from the borrowing entity. If I buy a muni bond slated for an affluent county in New Hampshire to build a new high school then my risk is considerably lower than buying a security where you are dependent on a group of individuals with unknown repayment ability actually completing the terms of their loan (MBS). They are completely different animals

As far as municipal defaults, sure it happens. But very infrequently. Even with piling up liabilities municipal entities generally are able to pay on their bonds even if it means issuing more bonds because if they default, all their liquidity dries up.

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