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Old 12-22-2010, 04:39 PM   #41
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Good luck with those risk assessments.
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Old 12-22-2010, 05:00 PM   #42
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Good luck with those risk assessments.
thanks. I harvested a 2% capital loss on my Vanguard VWITX fund today (although it was positive if you count the interest) and invested in a much more stable mix of large caps. Having losses in something that pays about like a bank CD isn't my idea of good risk vs reward, but to each his own I guess. If we get to the point where VWITX is paying 6% or so, i will re-evaluate the situation.
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Old 12-22-2010, 07:28 PM   #43
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brewer12335,

do you buy junk bonds or junk bond funds? they have high yields too but are considered risky and by many inappropriate as a fixed income holding. i am not an expert on any bonds but munis just seemed to be poised for defaults should cities and states start going broke. pension and benefits promised to current and future retirees sound like they can not be met in this economic environment or over the next 40 years.

an 8% yield on a muni, sounds great, but is there is a reason why that coupon is so high? look at bonds from greece or ireland or portgual, they have high coupons too and for good reason. i am not saying you are wrong rather i am citing what i see as warning signs and remembering the ole saying if it looks too good to be true....
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Old 12-22-2010, 08:39 PM   #44
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Is anyone on this board going to sell his/her municipal bonds ? I am thinking of selling mine.
I didn't own municipal bonds but I bought into 4 different municipal bond funds in January 2010. They were a mix of short, intermediate and long.
They did well all year long until QE2 announcement which included the end of Build America Bonds for 2011. Those funds fell like a rock and I finally sold them all right before I started losing principal. In four weeks time the funds lost the entire years worth of dividends paid as well as all of the Capital Gains for the year. I had chosen those funds to replace "money market" cash and I had a low risk tolerance for that money so I sold.
I know we're not supposed to try and time the market but I just didn't understand what was going on and I went against "buy and hold" and sold anyway.
Thanks to Brewer for helping me understand what was going on. I personally think it was the right decision for me anyway.
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Old 12-22-2010, 08:44 PM   #45
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I didn't own municipal bonds but I bought into 4 different municipal bond funds in January 2010. They were a mix of short, intermediate and long.
They did well all year long until QE2 announcement which included the end of Build America Bonds for 2011. Those funds fell like a rock and I finally sold them all right before I started losing principal. In four weeks time the funds lost the entire years worth of dividends paid as well as all of the Capital Gains for the year. I had chosen those funds to replace "money market" cash and I had a low risk tolerance for that money so I sold.
I know we're not supposed to try and time the market but I just didn't understand what was going on and I went against "buy and hold" and sold anyway.
Thanks to Brewer for helping me understand what was going on. I personally think it was the right decision for me anyway.
This is my point. Everyone says muni bonds are so safe, and yet you give an example of practically worse performance than sticking the money in your matress. I made about 1% on my muni bonds in a year, so did a bit better than you. Was it worth risking principal for a 1% return? Hell no.
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Old 12-22-2010, 09:00 PM   #46
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This is my point. Everyone says muni bonds are so safe, and yet you give an example of practically worse performance than sticking the money in your matress. I made about 1% on my muni bonds in a year, so did a bit better than you. Was it worth risking principal for a 1% return? Hell no.
If I hadn't sold, it would have been much worse than having money in the mattress. I did make a few $$ but If I had sold when I first became suspicious of what was going on, I would have been "a genius". (I know...hindsight).
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Old 12-22-2010, 10:23 PM   #47
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BigCharts - QuickCharts

BigCharts - QuickCharts

It isn't just the munis the Vanguard Long Term Treasuries took a similar hit.
My only guess is that the market is expecting interest rates to go up. The $ has gotten stronger.


http://bigcharts.marketwatch.com/qui...=3044712&time=
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Old 12-23-2010, 02:00 AM   #48
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Is anyone on this board going to sell his/her municipal bonds ? I am thinking of selling mine.

My muni position is down from 300K, in 1999 when I was working and had just retired, to single position from Puerto Rico 15K. (Brewer says PR finances are horrible BTW) I have sold some bond, had a few redeemed but the bulk of them have been called away.

To me the call risk is one under appreciated risk of own individual munis and too a lesser extend muni funds. At least they were to me when my initial plan was to have $1 million worth of muni's @5% giving 50K tax free pension.

Almost all muni's have a call provision, which allows the bond to call at par or with a small premium typically after 5 year.

Unlike corporations which may only issue debt for special project, municipalities are constantly rolling over the debt. Hence part of the problem. So they are constantly engage in interest rate arbitrage.

Say that we have a normal yield curve and 10 year muni's are 3%, 20 3.5% and 30 year 4%. You have a healthy pension, and lots of interest and rent income and so muni's make sense from a tax prospective. You buy some 30 years bonds for your retirement. As we know if interest rates rise the value of the bond goes down, but the nominal income rise. What if rates go down, well the bonds don't go up much because of the call provisions, and municipal do call them. So suddenly you find yourself with cash you don't need and have to invest that you hadn't plan on.a

The real gotcha is even when interest rates remain flat your bonds still get called. Let say that your 30 year bond was paying 4% 10 years go by and 20 year bonds are still 3.5%. They'll issue a 20 year bond a save the 1/2 percent per year. That is what a San Diego utility did recently with one of my 30 years bonds with 16 years left, even that it was only A rated they called my bond than floated a new issue with a 15 year maturity. You see the same phenomena with muni bond funds in the form of lower distributions even the price is going up.
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Old 12-23-2010, 02:11 AM   #49
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There is still IMO a real danger with default risk for muni's. It isn't huge but it is an order of magnitude larger than it has been in our lifetime.


Here is article from the WSJ that points out a fight we may see on the board....

Quote:
For cities and towns facing unsustainable pension costs, the end game may look something like Prichard, Ala.
The financially troubled suburb of Mobile turned to bankruptcy court in October 2009 when it "simply ran of money to pay its pension obligations," says the city's lawyer R. Scott Williams.
Prichard proposed capping benefits to current retirees at about $200 a month, down from monthly payments of as much as $3,000. "That's not a hair cut, that's a scalping," said Larry Voit, who represented a group of 40 retired city workers in Prichard, population 27,500.
Though bankruptcy law remains murky on how far a city or town can go in scrapping deals for current retirees, cases like Prichard and other workout efforts stand to reshape the debate over how local governments deal with mounting public-pension problems.
The stakes are high for taxpayers, public workers and bondholders, as concerns escalate about whether governments can pay their debts.

...

But Chapter 9 remains a largely untested corner of the bankruptcy code, and bondholders aren't necessarily insulated from loss, lawyers say. Vallejo, Calif., which sought bankruptcy protection in 2008, is still negotiating with holders of $52 million in debt over terms of a possible haircut, according to the city's lawyer.
So there you have issue ;do retirees with pensions get hosed, or do bond holders get screwed.? Perhaps the state or Uncle Sam rides to the rescue?

It does appear that Chinese curse of "may you live in interesting times" has afflicted us.
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Old 12-23-2010, 07:08 AM   #50
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brewer12335,

do you buy junk bonds or junk bond funds? they have high yields too but are considered risky and by many inappropriate as a fixed income holding. i am not an expert on any bonds but munis just seemed to be poised for defaults should cities and states start going broke. pension and benefits promised to current and future retirees sound like they can not be met in this economic environment or over the next 40 years.

an 8% yield on a muni, sounds great, but is there is a reason why that coupon is so high? look at bonds from greece or ireland or portgual, they have high coupons too and for good reason. i am not saying you are wrong rather i am citing what i see as warning signs and remembering the ole saying if it looks too good to be true....
At the moment I own one "true" junk bond and a "crossover credit/5 Bs" bond. The former matures in 4 years and the issuer will likely call it within 2. I bought at 60 cents on the dollar and I am just clipping coupons until the call or maturity as I am comfy with the issuer. The latter is a company which is split rated (one investment grade rating, one junk), the sort of think the VG junk fund owns. It matures in 4.5 years and I bought it at 67 cents on the dollar. I am comfy with the issuer and it trades "by appointment only" (illiquid), so I will hold it until maturity or a fat bid shows up. Other than that, I liquidated my junk (especially funds) because what I owned was deeply junky and had been bought down in the pit of the credit market crash. The VG fund is much higher quality and a smaller allocation would be OK to hold as part of a diversified portfolio.

The junk market is a funny thing. In good times, I really am not interested in owning the whole market because there are too many underpriced risks in it, although I will grab a distressed name from time to time if it is a compelling value. However, the junk market regularly blows up (every 3 to 5 years) and when it does junk can get very attractive. Most of the time, you still would not want to own the whole junk market because there are too many messes. But if you can do credit work and distinguish between the survivors and the likely bankruptcies, you can make a killing since the good names sell off with the bad. So in 2009 I bought bonds trading from 30 to 75 cents on the dollar (and some were investment grade) because the market was grossly mispricing these names.

If the muni market has a blowup, I intend to be be standing by to pluck the pearls out at porkchop prices, just as I do with the junk market when it blows up. The muni market is dominated by retail investors (dumb money) to a far greater extent than the taxable bond market. As such, I would expect a blow up to show really big mispricings of individual issuer risk.

Will we see a muni bond market implosion? I dunno, but if it happens I will be ready.
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Old 12-23-2010, 11:16 AM   #51
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Unlike corporations which may only issue debt for special project, municipalities are constantly rolling over the debt. Hence part of the problem. So they are constantly engage in interest rate arbitrage.
This is the first I have heard about this. Corporations that I own frequently issue bonds for "general corporate purposes". Unless I am mistaken, interest rate and yield curve arbitrage is an important part of a CFOs job.

Ha
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Old 12-23-2010, 04:51 PM   #52
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This is the first I have heard about this. Corporations that I own frequently issue bonds for "general corporate purposes". Unless I am mistaken, interest rate and yield curve arbitrage is an important part of a CFOs job.

Ha
It certainly depends on the corporations. Financial and corporations that have a financial operation do have many bonds issues and the CFO do exactly has you say.

Still if you look at the Dow components the JNJ, MMM, XOM, CVX,HD many of them only 15 or less bond issues. The tech stocks, INTC, MSFT, and CISCO have even less 1/2 dozen bond issue and of course AAPL has no debt. This means they are only issuing a couple of bonds a year.

My perception is that on whole US corporation are carrying less heavy debt load say a 25% debt to equity ratio and are really less on debt rolling over than municipalities.
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Old 12-23-2010, 04:53 PM   #53
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My perception is that on whole US corporation are ... less on debt rolling over than municipalities.
No doubt about that!

Ha
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