Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Bad debt in the bond mutual funds
Old 07-01-2015, 03:55 PM   #1
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 1,049
Bad debt in the bond mutual funds

NY Times article today detailing Puerto Rico's 72 billion dollar debt crisis.

"It is estimated that 75 percent of the mutual funds tracked by Morningstar now hold at least some Puerto Rico debt."

Puerto Rico's governor announced they can't repay it. I have no doubt they will restructure the debt but anyone who has paid attention knows it is a house of cards. They are borrowing to service debt which is as bad a sign as can be.

Dare I say it? could it be the bond funds don't represent the safety most believe they do. When does the debt become like lead in your lifeboat?

California $617.6 billion
New York $300.1 billion
Texas $287 billion
New Jersey $282.4 billion,
Illinois, with $271.1 billion


Sent from my iPad using Early Retirement Forum.
__________________

__________________
rayinpenn is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-01-2015, 04:01 PM   #2
Thinks s/he gets paid by the post
Big_Hitter's Avatar
 
Join Date: May 2013
Location: In the fairway
Posts: 4,098
Quote:
Originally Posted by rayinpenn View Post
Dare I say it? could it be the bond funds don't represent the safety most believe they do.


.
even mutual funds are subject to default risk
__________________

__________________
Swing hard, look up
Big_Hitter is online now   Reply With Quote
Old 07-01-2015, 04:06 PM   #3
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 1,049
Obviously but so many consider them a safe habor.


Sent from my iPad using Early Retirement Forum.
__________________
rayinpenn is offline   Reply With Quote
Old 07-01-2015, 04:12 PM   #4
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 882
some state tax exempt funds identified in the paper today had ~50% in PR bonds. Fund buyers probably didn't look at prospectus or holdings so I am not that sympathetic.
__________________
jebmke is offline   Reply With Quote
Old 07-01-2015, 04:17 PM   #5
Thinks s/he gets paid by the post
JoeWras's Avatar
 
Join Date: Sep 2012
Posts: 2,524
I examined the portfolio holdings of one of the Vanguard munis, VWIUX. Looks like they hold about 0.2% in PR bonds.

I remember this subject came up last year in one of their video streams and basically they said they are keeping their exposure low based on the risk.

Obviously, it isn't zero. They do have a small amount of riskier funds.

Now if NY or CA starts having serious issues, then this fund is going to crater. NY+CA accounts for 1/3 of the fund's holdings.

(EDIT: Found an article from 2013 discussing VWIUX, and at that time exposure was 0.8%. So they clearly have been reducing their position over the years.)
__________________
JoeWras is online now   Reply With Quote
Old 07-01-2015, 04:26 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,435
One article reported that ~$11.3b is owned by mutual funds and the majority of the exposure is muni-bond and high-yield bond funds. According to the Investment Company Fact Book the net assets of muni and high yield bond funds at the end of 2014 was ~$534b. I suspect that the $11.3b number is par value so the value included in the $534b is probably already discounted some for credit risk since it would be marked-to-market.

I suspect that there will be a hit, but not a cataclysmic hit other than for investors in mutual funds that decided to make a big bet on PR bonds.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 07-01-2015, 04:37 PM   #7
Thinks s/he gets paid by the post
JoeWras's Avatar
 
Join Date: Sep 2012
Posts: 2,524
Quote:
Originally Posted by jebmke View Post
some state tax exempt funds identified in the paper today had ~50% in PR bonds. Fund buyers probably didn't look at prospectus or holdings so I am not that sympathetic.
This is the scary part. If you look at some of the funds typically sold by brokers, they have very high PR bond exposure. These are sold as "Arizona" or "North Carolina" tax free bonds, for example. Problem is they are not all AZ or NC bonds, but like you say may have up to 50% in PR.

YIKES.
__________________
JoeWras is online now   Reply With Quote
Old 07-01-2015, 04:46 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 1,495
Tune out the noise.

See this:

https://institutional.vanguard.com/V...ndexGoodChoice

Specifically:

Quote:
Highlighting the uncertainty of fixed income markets, Mr. Barrickman cited forecasts of rising rates that haven't panned out in recent years. "The consensus forecast that rates couldn't stay so low for so long has proven wrong," he said. "There are numerous variables that drive interest rate changes, including unemployment rates, inflation, economic growth, and short-term technical factors such as trading dynamics. All of these factors are difficult to predict in their own right."
Emphasis Added

Everyone is the smartest person in the room until they're not.
__________________
Options is offline   Reply With Quote
Old 07-01-2015, 05:08 PM   #9
Thinks s/he gets paid by the post
JoeWras's Avatar
 
Join Date: Sep 2012
Posts: 2,524
Quote:
Originally Posted by Options View Post
Tune out the noise.
Yep. I'm still in. With indexing on a broad base.

But, it isn't "noise" if you find yourself in a fund called "Virginia Muni" when it consists of 25% PR bonds!

The lesson here is know what you are investing in.

BTW, I wondered why Vanguard doesn't offer munis for many states, while other companies do. I think it has to do with the liquidity issue. Somes states just don't have a lot of Muni debt. It isn't even practical, or possible to create a fund.

Those companies which created these state-specific tax advantaged funds in small market bond states relied on the volume of PR bonds which could be added to the mix.
__________________
JoeWras is online now   Reply With Quote
Bad debt in the bond mutual funds
Old 07-01-2015, 05:30 PM   #10
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 1,049
Bad debt in the bond mutual funds

I lost faith in the rating agencies some time ago and lost faith the "experts" when long term capital management Nobel laureates bankrupted their firm. Seems like common sense is a lost art. Clearly all we can do is seek diversification and pray noone you care about has their pension funds invested in that junk....

Would you loan money to a "spender" friend who is in debt up to their eyeballs?
Anyone remember what a Brady bond was? how about LDC debt.


Sent from my iPad using Early Retirement Forum.
__________________
rayinpenn is offline   Reply With Quote
Old 07-01-2015, 05:47 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,282
Quote:
Originally Posted by rayinpenn View Post
NY Times article today detailing Puerto Rico's 72 billion dollar debt crisis.

"It is estimated that 75 percent of the mutual funds tracked by Morningstar now hold at least some Puerto Rico debt." ...
"at least some" - that isn't very helpful. Sounds like typical 'scare' headlines.

I checked FTBFX, and there were two holdings of Liberty Cablevision of Puerto Rico (not even direct PR debt). Each added up to 0.009% of total holdings.



Quote:
Dare I say it? could it be the bond funds don't represent the safety most believe they do. ... .
And what do 'most' believe? Do they believe that none of their holdings can default? That isn't reasonable, unless maybe they are in the highest safety rated funds. What I believe (since I look at the prospectus), is that the big index-style bond funds are well diversified.

What do you believe?

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 07-01-2015, 05:52 PM   #12
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 1,049
What I believe is I am concerned with how easily we accept the increasing debt loads of our government institutions...


Sent from my iPad using Early Retirement Forum.
__________________
rayinpenn is offline   Reply With Quote
Old 07-01-2015, 06:25 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by rayinpenn View Post
What I believe is I am concerned with how easily we accept the increasing debt loads of our government institutions...


Sent from my iPad using Early Retirement Forum.
PR is "special." Banana republic that has been the bastard child of Congress forever. The local economy has been a trainwreck since around 2005. Most of the banks on the island have failed, some more than once (a real accomplishment). Then you have all these idiot yield chasers willing to lend on easy terms and a population that can split for the mainland US any time they like and show up as bona fide citizens with a passport and everything.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 07-01-2015, 07:45 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 7,379
Quote:
Originally Posted by brewer12345 View Post
PR is "special." Banana republic that has been the bastard child of Congress forever. The local economy has been a trainwreck since around 2005. Most of the banks on the island have failed, some more than once (a real accomplishment). Then you have all these idiot yield chasers willing to lend on easy terms and a population that can split for the mainland US any time they like and show up as bona fide citizens with a passport and everything.

The thing I like about your posts Brewer (besides the fact I agree with almost everything you ever post) is no one should finish reading it without knowing which side of the fence you are on!


Sent from my iPad using Tapatalk
__________________
Mulligan is offline   Reply With Quote
Old 07-01-2015, 08:44 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Quote:
Originally Posted by Mulligan View Post
The thing I like about your posts Brewer (besides the fact I agree with almost everything you ever post) is no one should finish reading it without knowing which side of the fence you are on!


Sent from my iPad using Tapatalk
Heh, I actually don't have a dog in this one, I just think the outcome was predictable. I visited pr many times and appreciate the place, people and culture. I just do not want to lend them money.
__________________
brewer12345 is offline   Reply With Quote
Old 07-01-2015, 09:08 PM   #16
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 1,495
Quote:
Originally Posted by JoeWras View Post
...

But, it isn't "noise" if you find yourself in a fund called "Virginia Muni" when it consists of 25% PR bonds!

The lesson here is know what you are investing in.

...
Absolutely. What is one doing in a Virginia Muni fund with 25% PR bonds to begin with, unless of course, one is the smartest person in the room.
__________________
Options is offline   Reply With Quote
Old 07-01-2015, 09:33 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
I've held some PR infrastructure financing bonds (evidently Rum tax) since 1999 which mature in 2017. The 5.5% coupon has been paid faithfully every 6 months.

I have to admit I was anxious today, but I just checked my account and the interest payment was deposited :dance

Every since Brewer alerted to me of the problem many years ago I've been trying to figure out what to do with them. The Schwab quote of $97.13 I know from past experience isn't actually what I can sell them for so I've just been holding them. Last I looked I was getting approximately 15%/year to hold them.

They are insured although it is far from clear that bond insurance company has the money to pay the claims. Some of the final structurally damaged caused by the great recession.
__________________
clifp is offline   Reply With Quote
Old 07-01-2015, 11:02 PM   #18
Moderator Emeritus
aja8888's Avatar
 
Join Date: Apr 2011
Location: The Woodlands, TX
Posts: 7,164
Quote:
Originally Posted by brewer12345 View Post
PR is "special." Banana republic that has been the bastard child of Congress forever. The local economy has been a trainwreck since around 2005. Most of the banks on the island have failed, some more than once (a real accomplishment). Then you have all these idiot yield chasers willing to lend on easy terms and a population that can split for the mainland US any time they like and show up as bona fide citizens with a passport and everything.
I have a lot of experience in PR working with clients (Mainland and Foreign) that were interested in buying and rehabilitating several refineries and chemical plants on the island. One facility in particular was Conoco/Phillips refinery and parazylene unit in Gueaga (SP). That plant was shut down and mothballed for years and just about rusted into the ground before it was looked at several times and eventually not sold.

Other facilities previously operated by a host of owners (private equity, big funds, etc) all eventually either rusted into the soils or could not meet capital upgrade requirements enforced by EPA Region 2 out of New England (yes, they have jurisdiction). Feedstock issues are also a killer as refinery naphtha (not crude oil) is brought in by expensive ships for processing into fuels. (No oil production on the island).

Then there is the tuna canning industry....one plant was left out of 5 (?) and it was Bumble Bee's. I doubt if that is still operating.

In summary, industry is dying and leaving and the remaining jobs are low paying.
__________________
......."Everybody has a plan until they get punched in the face." -- philosopher Mike Tyson.
aja8888 is offline   Reply With Quote
Old 07-02-2015, 03:06 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Posts: 1,661
We can't just say that people look at bond funds as safe investments and then talk about PR bonds without a little more definition. I agree that many see high quality bond funds as a bit more safe (sans interest rate risk). But PR bonds are likely now on the riskier side of high yield or beyond what some HY will use. A bond is not a bond.. and a bond fund is not a bond fund... you have to look at the goals of the fund, quality and duration of the bonds. If one is chasing yield, it is likely to be at the expense of quality and has increased risk.
__________________
bingybear is offline   Reply With Quote
Old 07-02-2015, 06:12 AM   #20
Thinks s/he gets paid by the post
Tadpole's Avatar
 
Join Date: Jul 2004
Posts: 1,170
So moving from bonds to "frontier" markets is becoming a flight to safety.
__________________

__________________
Tadpole is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
When we say "Bonds" do we mean Bond Mutual Funds? Retire2013 FIRE and Money 19 01-29-2013 01:50 PM
Why are muni-bond mutual funds tanking? dessert Stock Picking and Market Strategy 20 12-16-2010 07:50 PM
Bond mutual funds Brat Stock Picking and Market Strategy 4 08-03-2010 08:50 PM
Bond investing (ETFs vs Mutual funds) jIMOh FIRE and Money 4 10-04-2008 07:52 AM
Good Debt vs Bad Debt Tommy_Dolitte Young Dreamers 7 09-13-2004 10:37 PM

 

 
All times are GMT -6. The time now is 12:24 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.