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Safe Harbor Investment Covenants

Written By Brian Hicks

Posted October 30, 2008

With only one day left in the month, it’s fitting that tomorrow is Halloween. That’s because barring a massive rally over today and tomorrow, October 2008 will go down as one of Wall Street’s scariest months ever.

As of yesterday’s close, the Dow had lost 1,860 points, the S&P 236 points and the NASDAQ 425 points. That adds up to roughly a 20% loss across the broader markets in four weeks, which is practically off-the-charts.

In fact, in and of itself it amounts to the worst of both worlds—a bear market within a bear market.

But that doesn’t mean there hasn’t been anything but clouds this month. Panic selling has produced its fair share of silver linings too.

In fact, if there is one opportunity in the market right now that is a screaming buy, it’s definitely "Safe Harbor Investment Covenants."

Safe Harbor Investment Covenants: The #1 Investment for Billionaires

Why is that, you ask? Well, it’s simple, really.

These investment vehicles provide tax-free income while also guaranteeing the return on your principal. In fact, historically speaking, "Safe Harbor Investment Covenants" have made money 99.93% of the time.

That’s why they are the investment of choice among America’s wealthy. They are virtually risk free.

In fact, according to the Wall Street Journal, "large investors are snapping up these investments." Billionaire Wilbur Ross is one of them, having purchased $1 billion worth this year alone.

But the best part about these investments is that they have absolutely been put on the bargain rack during the sell off.

That’s because as redemptions, forced selling, and margin calls have taken the markets lower, even the most reliable investments have been trampled upon. That has provided contrarian investors the opportunity to pick up some  low hanging fruit.

One of them, of course has been in blue chip stocks. I wrote about them earlier in the month and they have done quite well.

The other, however, has been in bonds—specifically state and local bonds—which make up the holdings of these safe harbor investment covenants.

That puts them nearly par with the portion of the market that everyone thinks of when they are considering a flight to safety—U.S. Treasuries. That’s how safe these obligations are.

There is however, one important difference these days and it is a big one: these obligations currently pay a higher yield than U.S. Treasuries.

I’ll share more on that later.

3 Reasons to Invest in Safe Harbor Investment Covenants

First, though, I’d like to clear up a few common misconceptions about these types of investments.

You see, they’re not only just for the very old, the very rich or for the very conservative. Instead, these vehicles can make up an important component of a strategically balanced portfolio—no matter what stage of life you are in.

Safe harbor investment covenants can:

  • Provide investment stability to help buffer against the volatility of the stock market (not a bad idea these days).
  • Pay a steady stream of income, sometimes tax-free income, which can help with living expenses. (Tax-free cash flow? Sign me up.)
  • Provide high rates of return to grow your capital (higher-yield with lower risk).


So What Is a Safe Harbor Investment Covenant?

In short, these obligations are like all bonds, meaning they are essentially IOUs.

However, these IOU’s  are issued by any municipal organization, including cities, counties, states, and school districts. The purpose of these bonds is for general expenditures or to fund specific projects such as highways, new schools, or an athletic stadium.

These bonds offer the municipality the ability to raise funds without directly raising taxes. Of course, that is also what makes them so intrinsically safe.  Their cash flows and repayments come courtesy of the taxpayers

That’s why these particular bonds are generally considered much safer investments than corporate bonds, because a local government is far less likely to go bankrupt than a corporation. Its tax base—as with U.S. Treasuries— is the ultimate backstop.

There is, however, one important difference between U.S. Treasuries and these municipal issues. They generally also carry less interest rate risk overall.

That’s because, unlike U.S. Treasuries, which have big overseas investors, municipal debts are 70% owned by individual investors like you and me who hold them until maturity. So prices for these bonds tend to stay relatively stable.

But that’s only part of what makes investing in these bonds so attractive to billionaires and non-billionaires alike.

As I alluded to earlier, the real reason is the difference in yield these days between them and risk-free U.S. Treasuries. And when you factor in the tax breaks, these state and local bonds actually beat U.S. Treasuries pretty handily.

Consider this:

In today’s tumultuous credit markets, intermediate-term, triple A rated muni-bonds now yield around 4.5%. That’s already higher than the 3.8% yield on a ten-year Treasury note, which is also taxable.

But with the their tax-free status, the "true yield" on these bonds actually rises to 6.78%, assuming a 33% federal tax bracket. That’s a significant increase in yield over Treasuries.

That makes these bonds one of the easiest tax shelters on the market today. And you don’t have to be rich to take advantage of them, even though the wealthy have been on to these benefits forever now.

So while October has certainly had more than its share of tricks, the market has been kind enough to hand out some treats too. Safe harbor investment covenants may just be the silver lining you are looking for.

To learn more about these secure investments, click here.

Your bargain-hunting analyst,

 steve sig

Steve Christ, Investment Director

The Wealth Advisory