Tax free munis - thoughts?

[freebird5825]

i am currently building up, using DCA, to a target amount of tax free munis using VWAHX. the strategy is to earn decent interest but keep it all in my pocket (reinvesting all dividends). so far so good. i really enjoyed putting that 1009-INT data into turbotax this year.

i've seen a few articles out there both pro and con.

i'm too lazy to buy bonds directly, so i stick with MFs.

any other tax-free muni holders out there? thoughts?

 

[audreyh1]

I've been keeping my eye on FTABX - the Fidelity "AMT Tax Free" muni bond fund. Mainly because right now muni's are getting killed, due to some artificial issues associated with bond insurance. Bill Gross thinks muni bonds are the best bargain they have been in decades.

Audrey

 

[freebird5825]

nice choice on FTABX. i did a direct fund comparison at M*.
exp ratio is 0.02 difference (FTABX > VWAHX).
comparable on most other fronts. VWAHX scored higher on long term returns, but not by much. i'll keep an eye on FTABX over time.

 

[Art G]

"High quality" muni bond funds may be an incredible buy right now. All that triple A paper for the first time that I've ever seen is coming under credit scrutiny. I can't fathom how the government doesn't bail out agencies such as ginnie mae and fannie mae. However, the question is, is the potential return worth the risk?
I've been noticing how insured muni bonds being offered are suddenly showing their underlying credit rating. This is a new phenomena. The truth is, a muni bond rated A-, but with AMBAC insurance to make it AAA, is in all likelihood a very solid bond even though that AMBAC insurance may prove to be questionable. JMO

 

[DblDoc]

For me bonds = treasuries (short and int). My risk is in the equity portion. This lesson was sharply brought home in the last 6 months by the lack of correlation with equities, commercial paper and now muni's...

DD

 

[Art G]

If the dollar keeps sinking, how safe do you feel with it? We're obviously seeing a major part of the market who feels they need gold to feel safe. My grandfather made a killing during the depression buying gold and diamonds, so I recognize the advance signals when I see them. Perhaps instead of treasuries, you should be looking into yen, or sen, or rubles or whatever the heck they're using in Dubai these days?

 

[freebird5825]

good stuff - i learned something. thanks!

i have been doing the DCA thing into VWAHX for several years. the combo of the dividends i'm earning and my ongoing DCA is racking up a serious level of principal. i wish to continue that, but like any prudent investor, i'm eyeing my asset allocation. i have other bond holdings besides VWAHX.

right now, temporarily, i'm sitting at 51 stocks/49 bonds. sitting the fence, so to speak.

before i FIREd myself almost 1 year ago, i ran at 60/40. my former tax bracket due to income only was 28%, and my cap gains/divs were pushing me too darn close to AMT.

i don't have to worry about AMT any more. whew!

i welcome any and all comments.

 

[DblDoc]

If the dollar keeps sinking, how safe do you feel with it? We're obviously seeing a major part of the market who feels they need gold to feel safe. My grandfather made a killing during the depression buying gold and diamonds, so I recognize the advance signals when I see them. Perhaps instead of treasuries, you should be looking into yen, or sen, or rubles or whatever the heck they're using in Dubai these days?

If the dollar keeps sinking I'm sure my holdings in foreign equity will do quite well. Its all about diversified holdings that are not correlated and staying the course, not chasing what I (or others) might think is the next hottest asset except maybe with a small portion of your holdings you set aside for hormone money.

DD

 

[freebird5825]

If the dollar keeps sinking I'm sure my holdings in foreign equity will do quite well. Its all about diversified holdings that are not correlated and staying the course, not chasing what I (or others) might think is the next hottest asset except maybe with a small portion of your holdings you set aside for hormone money.

DD

just for fun, i did a quick check on 2 of my international holdings for TTM (12 trailing months). both positive. all domestic funds are negative, but we knew that.

does 12% of portfolio in foreign stocks in a 54/46 asset allocation sound like too much? i'm not going to change it, just wanted some feedback. i know it's a risky position during strong dollar periods, but i have a really really long retirement time horizon.

 

[Art G]

Some muni bond funds are being forced to dump bonds due to margin calls. This shant be good.

 

[headingout]

freebird, I'm at 15% (overall) foreign equities in a portfolio that is approx 50/50 equities/bonds. With the US's debt problems, I don't think long-term prospects for the dollar are good. I've been disappointed to see high correlation between US and foreign equities in my portfolio the last 6 months, but believe they will depart in the long run.

 

[freebird5825]

Some muni bond funds are being forced to dump bonds due to margin calls. This shant be good.

got a link for further info? i'm a long term investor, so i don't make quick moves. but i do like to stay informed. anything you can send is appreciated.

 

[freebird5825]

freebird, I'm at 15% (overall) foreign equities in a portfolio that is approx 50/50 equities/bonds. With the US's debt problems, I don't think long-term prospects for the dollar are good. I've been disappointed to see high correlation between US and foreign equities in my portfolio the last 6 months, but believe they will depart in the long run.

we think alike.
i'm in a balanced position right now cuz i'm still under 1 year of FIRE and am seeing how i fare expense-wise. i intend to return to a 60/40 when i see how much i can continue to invest without shorting my living expenses and having enough mad money. i turn 49+1 (i refuse to do the math LOL) this year, so i have to keep sufficient growth in my portfolio.

 

[audreyh1]

Here's one from bloomberg!
Bloomberg.com: Special Report

FTABX as of yesterday was yielding 3.82% tax-free! Probably more as of today. Compare this to today's 10 year treasury yield of 3.54% taxable.

Hedge funds dumping == buying opportunity. This is quite a dislocation! The only question is whether more hedge funds will need to dump munis to meet margin calls.

Audrey

 

[Art G]

got a link for further info? i'm a long term investor, so i don't make quick moves. but i do like to stay informed. anything you can send is appreciated.

Not yet, they just mentioned it on CNBC.

 

[freebird5825]

Here's one from bloomberg!
Bloomberg.com: Special Report

FTABX as of yesterday was yielding 3.82% tax-free! Probably more as of today. Compare this to today's 10 year treasury yield of 3.54% taxable.

Hedge funds dumping == buying opportunity. This is quite a dislocation! The only question is whether more hedge funds will need to dump munis to meet margin calls.

Audrey

um...dumb question time...but i'm gonna ask it anyway...

re The $330 billion auction-rate market froze after dealers stopped purchasing the bonds when buyers failed to bid. Their lack of support has spread to the broader tax-exempt market, sending yields soaring.

prices fall = yields go up, right? <that was painful to ask>

so as long as the muni bonds are rated A or better, default is possible but not probable, and the individual investor holding muni bonds fund gets a higher yield as long as their fund manager doesn't panic.

 

[DblDoc]

just for fun, i did a quick check on 2 of my international holdings for TTM (12 trailing months). both positive. all domestic funds are negative, but we knew that.

does 12% of portfolio in foreign stocks in a 54/46 asset allocation sound like too much? i'm not going to change it, just wanted some feedback. i know it's a risky position during strong dollar periods, but i have a really really long retirement time horizon.

No actually you are on the low end as some argue up to about 50:50 domestic:foreign as that more closely approximates the world equity market.

DD

 

[Art G]

um...dumb question time...but i'm gonna ask it anyway...

re The $330 billion auction-rate market froze after dealers stopped purchasing the bonds when buyers failed to bid. Their lack of support has spread to the broader tax-exempt market, sending yields soaring.

prices fall = yields go up, right? <that was painful to ask>

so as long as the muni bonds are rated A or better, default is possible but not probable, and the individual investor holding muni bonds fund gets a higher yield as long as their fund manager doesn't panic.

Close. Actually, if they already own the bonds, it does nothing for their portfolio or yield other than looking worse on paper. However, if they have cash available, it gives them the ability to add bonds at a supposed discount. The problem currently is that some funds are getting hit with margin calls (pretty hard to believe considering you can margin up to 80% I believe on muni's), and instead of being able to buy at a discount, are having to sell at a discount.

 

[freebird5825]

thanks, ArtG and DD and Audrey

long ago and far away, i actually went all the way through the M* online free clasroom on investing, soup to nutz. I earned a really nice fleece pullover with the M* logo for my troubles. but i almost failed Bonds 101.

the only dumb question is the one not asked, right?

no brash moves coming on my part. riding the tide...and looking forward to those nice juicy dividends.

FYI, my stake in VWAHX is almost $75K with $400/mo new $ going in thru DCA. before this mess, i was earning almost $250/mo in tax free divs. so net monthly input is approx $650, compounding as i type.

my target build level is $100K. then i turn off my DCA to that fund and focus it elsewhere, probably my Roths.

rationale: it's going to be my tax free income generator so i don't have to go back to w-wo-wor - oh i can't say it. LOL

 

[MooreBonds]

Close. Actually, if they already own the bonds, it does nothing for their portfolio or yield other than looking worse on paper. However, if they have cash available, it gives them the ability to add bonds at a supposed discount.

Actually...if they already own the bonds, it can create a hell of a surge in interest income.

Depending on the covenants of the security, when an auction fails, the interest paid to the existing bond holders rises to the 'default rate'. My father has a private activity bond issued by Ameren, and the default rate is a whopping 18% - and the covenant for that particular security states that if the bond has a failed auction, the bonds enter "default" (not the same "default" as a borrower that is on the verge of bankruptcy and no longer pays interest) and the default rate applies UNTIL MATURITY (35 years from now). So, even if Ameren can get enough bond buyers at the next weekly auction, the rate remains at 18% until Ameren closes out the security. Part of the reason for an even greater scramble to issue longer-term fixed rate debt for some of these issuers.

While there would be a discount in the secondary market for fixed-rate bonds with higher municipal yields, the bonds referenced by freebird are the short-term auction market ones. These are sold every 1, 7 or 30 days by various institutions in order to capture what is (usually ) the lowest end of the yield curve (and, subsequently, traditionally the cheapest financing). They are usually sold at par, and pay a simple interest coupon. So, if the bonds fail at auction and enter default, the price doesn't really plummet to give an imputed annualized yield of, say, 18% with a coupon of 3% - the price stays at par, and merely resets the coupon rate to whatever the default rate is, for however long the default rate applies.

 

[outtarentals]

Freebird - I'm glad you brought this one up -
I sold some real estate last July, & since then have been buying 7 day periodic auction rate bonds through Schwab in increments of $25K each - (California Stat adj 2040 Rev due 07/01/40). These are totally tax free, including AMT free California Muni Bonds. CPA had advised me to find something like this at least through 2007. The return has averaged 3.5-4% and I've been content with that since it's all tax free - at least till I figure out what to do with the money. Schwab assured me that the insurer was triple A rated.

A few weeks ago, when I started hearing rumors of problems with the bond insurers, I told Schwab to sell everything- which they did. So now I'm just waiting to see what happens - don't have the stomach to jump in again just yet - though I'm tempted.

All these replies are so interesting and so timely - is this a great forum - or what!!

 

[freebird5825]

Freebird - I'm glad you brought this one up -
I sold some real estate last July, & since then have been buying 7 day periodic auction rate bonds through Schwab in increments of $25K each - (California Stat adj 2040 Rev due 07/01/40). These are totally tax free, including AMT free California Muni Bonds. CPA had advised me to find something like this at least through 2007. The return has averaged 3.5-4% and I've been content with that since it's all tax free - at least till I figure out what to do with the money. Schwab assured me that the insurer was triple A rated.

A few weeks ago, when I started hearing rumors of problems with the bond insurers, I told Schwab to sell everything- which they did. So now I'm just waiting to see what happens - don't have the stomach to jump in again just yet - though I'm tempted.

All these replies are so interesting and so timely - is this a great forum - or what!!

i don't buy individual bonds - too lazy. VWAHX with it's super low exp ratio and smarter ppl than I running it, suits me fine.

but i am getting an education in bond matters from all the replies here. thanks all! and please keep talking about the individual bond purchasing, i may eventually go there.

i'm going to continue my strategy to DCA to my target level of $100K and let it ride. i want to use the tax free dividends (afer the target level is reached) to pay my annual property and school taxes and free up some mad money from my fixed annuity and pension. robbing peter to pay paul so to speak, using tax free dividends from VWAHX to pay my local tax burden. is that cheating? LOL

comments?

 

[freebird5825]

re Actually...if they already own the bonds, it can create a hell of a surge in interest income.

music to my ears!

VWAHX has a low turnover rate. it will be interesting to see how it goes in 2008. i'm not really worried about fluctuations in the VWAHX NAV, cuz i'm not selling shares. just looking to pull off the dividends for property/school taxes next year.

is my thinking soiund?

 

[MooreBonds]

re Actually...if they already own the bonds, it can create a hell of a surge in interest income.

music to my ears!

VWAHX has a low turnover rate. it will be interesting to see how it goes in 2008. i'm not really worried about fluctuations in the VWAHX NAV, cuz i'm not selling shares. just looking to pull off the dividends for property/school taxes next year.

is my thinking soiund?

Freebird - My post was only in relation to the special auction municipal securities that have a 1/7/30 day cycle. Those are the ones that have been in the news as having 'failed auctions' and which are seeing the yields skyrocket. It is true that the entire municipal yield curve as a whole is trending higher due to the flight to Treasury-only. However, I don't believe that VWAHX invests a great percentage into those auction securities, so I wouldn't expect your VWAHX yield to suddenly mushroom - it might creep up 10-20 basis points as the overall muni yield curve rises, but don't plan on receiving 8% annual interest in the near future or anything crazy like that.

 

[ziggy29]

We're only in the 25% tax bracket and Texas has no state income tax, so munis make little sense for me. If my tax burden were higher, I'd definitely be looking at munis now. A lot of them have been pounded by the insurance situation, even some AA-rated GO bonds from relatively stable local governments. For people in higher brackets in states with a high income tax, they're a screaming buy relative to other fixed income investments.