Albuquerque investment advisor Lee Munson goes a step further, saying “What it is, it’s a marketing gimmick.”
Munson runs Portfolio Wealth Advisors, a private firm that manages some $200 million in assets. Prior to moving to Albuquerque, Munson penned the book “Rigged Money: Beating Wall Street at Its Own Game” and worked for a brokerage house on Wall Street.
“The problem and the devil in the detail is that step bonds usually come with call features,” Munson notes, “which means that after a set period of time, that issuer – the place that sold you the bond – can pull it back before that interest rate goes up.”
Bernalillo County County Commissioner Maggie Hart Stebbins says buying bonds with call features has handcuffed county finances.
“The county treasurer doesn’t have the decision-making authority about when those bonds are called,” Stebbins says, “The issuer has that power. And the issuer is going to make that decision based on what’s good for his or her agency — not us.”
Of the 47 bond purchases reviewed by KRQE News 13, all but one had a call feature.
The gamble by Ortiz and Padilla meant that as long as the issuer called the bond in time to free up needed cash for the county, the pair could buy bonds with maturities well past the recommended date. Over the course of the last few years, the bets paid off in millions of extra money for Bernalillo County.
Now, with the prospect of higher interest rates inching ever closer, fewer bonds are getting called. Issuers prefer to leave their bonds — which amount to a loan — outstanding, knowing they can’t borrow at a lower rate.
The math of the bond markets means the county can lose another way, too.
“When a bond is getting called,” Munson says, “it means you lost the bet.”
He explains that as interest rates fall, bond holders find it’s cheaper to call their bonds in than issue new ones at a lower rate. As that happens, bonds that pay the old, higher rates gain value. Investors who hold bonds can then sell at a premium, getting back not just the face value of the bond they’d get at call, but a few extra bucks from buyers who are anxious to own a bond that pays a higher interest rate.
