Question on Municipal Bonds

[CarNut]

Question from a newbie on this forum. I'm looking for somewhere to put my expiring CD investments (liquid funds). I've been looking into laddering Municipal bonds. Thinking about spreading them out into 5-10 year maturity ranges till interest rates recover. The S&P aaa Muni's are paying 4.5-5.5% tax free yeilds, and are actually looking a lot better and safer than the taxable corporate bonds. I plan on holding the bonds to maturity so resale value drop is not a big issue. Any thoughts or comments ??. My broker is trying to push mutual funds, but I already have part my longer term investments in a balanced set of mutuals.

 

[brewer12345]

Sounds OK to me. Personally, I would stick to general obligation (GO) bonds issued by states or counties with solid ratings. Maybe a few other situations would be OK (Port Authority of NY/NJ, for example), but don't get too far into the weeds.

 

[FinanceDude]

Agree on GO bonds, I use them all the time. Broker is pushing mutual funds because he makes a lot more on them than on selling you bonds........

 

[Stevewc]

Sounds OK to me. Personally, I would stick to general obligation (GO) bonds issued by states or counties with solid ratings. Maybe a few other situations would be OK (Port Authority of NY/NJ, for example), but don't get too far into the weeds.

Hello Brewer,
If you were buying individual muni bonds in your own state what kind of guide lines would you go by?
I mean things like amount of money per bond?
How many years would you go out in todays market?
That kind of thing,
Thanks for your thoughts,
Steve (Alabama to give a clue where I would be buying)

 

[brewer12345]

Hello Brewer,
If you were buying individual muni bonds in your own state what kind of guide lines would you go by?
I mean things like amount of money per bond?
How many years would you go out in todays market?
That kind of thing,
Thanks for your thoughts,
Steve (Alabama to give a clue where I would be buying)

Cannot speak to AL's creditworthiness, but if state GO bonds are rated AA-/Aa3 or better I would be comfy with them.

GO bonds are pretty much the same thing by issue, with the main difference between them the coupon and the maturity. So if you set up a ladder of state GO bonds it would be pretty simple. I personally tend to concentrate in the 5 to 10 year range, but YMMV.

As for other entities, it is really a mixed bag. You have to actually know something about anything other than the state to buy the bonds. I'd buy bonds issued by the county I live in because the county GO bonds are rated Aaa/AAA without insurance and I know the way the county is run. I'd buy Port Authority bonds because they are backed by all the bridges and tunnels around NYC (and take a look wat it costs to go over the Verrazano Narrows Bridge). Other than that, I would be really picky.

 

[HFWR]

Hey Brew, what's a good source for researching GO bonds?

 

[brewer12345]

Hey Brew, what's a good source for researching GO bonds?

Dunno. Muni bonds are a bit of a backwater with much less disclosure than listed equity. That's why I suggest sticking with state GO bonds and perhaps a few other specific issuers that you happen to know.

If anyone else finds goo sources of info, I am all ears.

 

[Stevewc]

Brewer,
Have you ever heard of "Morgan Keegan" ?
They are owned by Regions Bank.
At this point, I have bought one muni bond through them and am considering others as they become available.
So far they seem to be my best bet in my area.
I think I will only buy new issues until I get more familiar with bond purchases.
Steve

 

[brewer12345]

Brewer,
Have you ever heard of "Morgan Keegan" ?
They are owned by Regions Bank.
At this point, I have bought one muni bond from them and am considering others as they become available.
So far they seem to be my best bet in my area.
I think I will only buy new issues until I get more familiar with bond purchases.
Steve

Yes, have heard of them. Regional broker.

New issue or secondary doesn't really matter, so long as it is the same issuer and you are OK with the yield and maturity.

 

[Stevewc]

Brewer the bond guru,
Would you even consider buying a (GO) bond from a small but growing community? If you knew they were well run/organized and highly rated?
Do you limit the amount you invest in single bonds? Some rule like never more than 25K or 50K? To spread your odd's of default out more?
I guess its your night to be interigated,
Thanks Brewer,
Steve

 

[brewer12345]

Small is a negative, all else being equal. Growth is good, but not if it is too fast (issuers can overleverage themselves during torrid growth assuming that they will grow into it and its ugly when the music stops).

As for single issuer limits, I tend to think of percentages of total for exposure and pay attention to correlated issuers. You would probably allow a very high % of total to be state GO bonds if you are comfy with the state's credit profile, but for a municipality or other entity you might want to keep exposure to 10% or less, with something in between for bigger, stronger entities that are not the state.

The corelation issue can be a little tricky and requires thought. I would not want to buy lots of bonds from two municipalities that are right next to eash other because what hurts one will probably hurt the other and your cumulative exposure to bad things could be much bigger than an individual position would suggest. OTOH, in my home state I would willing buy bonds issued by Atlantic City (since they can milk the casinos forever) and by Monmouth County (growing suburban area with no connection to AC) and not worry about the two getting hammered by the same event.

I should alos note that what I am describing is the way to do this if you are being ultra careful and looking to preserve capital. I regularly ignore all the above advice in my bond portfolio (mostly corporates) when I see opportunities for very high returns from doing so. But what I would do is inapropriate for someone looking for a CD equivalent.

 

[Purron]

You might consider bonds from areas around DC. I live in Faifax County, VA - population over 1 million and their bonds are highly rated. Plus, since it looks like the Federal Government is not downsizing anytime too soon, the local economy does not face as much risk as some other areas in the country.

 

[brewer12345]

You might consider bonds from areas around DC. I live in Faifax County, VA - population over 1 million and their bonds are highly rated. Plus, since it looks like the Federal Government is not downsizing anytime too soon, the local economy does not face as much risk as some other areas in the country.

There are lots of areas that would be attractive credits, but if they are outside the state of AL the interest thereon would be subject to 'bama state income taxes for OP.

 

[clifp]

Since we are on the ask the bond expert show.

I've bought a fair number Puerto Rico bonds over the years. The interest is both federal and state tax exempt, which is handy if you are planning on moving or live in a state without a lot of muni bonds.

I notice that there is a often difference opinion of 2+ grades between the Moody's and S&P on the bonds. Any thoughts on Puerto Rico or which agencies is more reliable in rating their bonds.

 

[brewer12345]

Puerto Rico has many charms, but its finances make California look like Switzerland. There is a lot more political chicanery and the economy has been in recession since 2005, so the range of outcomes is pretty wide. That is why you see the ratings divergence, IMO.

 

[Purron]

There are lots of areas that would be attractive credits, but if they are outside the state of AL the interest thereon would be subject to 'bama state income taxes for OP.

Great point brewer. The lack of a state income tax exemption on the interest income would significantly impact the real yield on such an investment for the OP. This, along with many other factors, must be taken into account as is the case with any investment decision.

Perhaps I should look more closely at this for myself as a resident of VA. I'm in much the same position as the OP in that I'm also concerned about the low interest rates for my CDs that are maturing. I was spoilied by good rates but that appears to be a thing of the past. I've read rates may increase so am hanging in there for now.

 

[brewer12345]

Don't forget about Pen Fed. Still offering 4% on a 5 year CD that you can cash in any time for a 6 month interest penalty.

 

[CarNut]

Hey , thanks for the wealth of information.. Going to do some homework on in state (Georgia) bonds and look at state tax implications. Georgia does not tax unearned income up to a certain level for retirees, so I have to do some calculations. I live near Atlanta and knowing what's going on financially in the city scares me away from there. CD's are due this coming week then I plan to sit down with my financial adviser and see what bond issues he pulls off his magic computer screen. I feel like I'm armed with enough ideas to frustrate him, but that's what he gets paid for. I'll update this thread with the outcome..

 

[brewer12345]

I'll be curious to hear what options they present you with.

 

[FinanceDude]

Puerto Rico has many charms, but its finances make California look like Switzerland. There is a lot more political chicanery and the economy has been in recession since 2005, so the range of outcomes is pretty wide. That is why you see the ratings divergence, IMO.

I thought Puerto Rican bonds were unofficially "backed" by the US govt, making them safe. I can't find comfirmation of that, brewer do you know the answer??

 

[brewer12345]

I thought Puerto Rican bonds were unofficially "backed" by the US govt, making them safe. I can't find comfirmation of that, brewer do you know the answer??

That's the first I have heard of it. Sounds like a dangerous assumption to make, and the public ratings of the bonds indicate that no such support is expected by Moody's or S&P.

 

[freebird5825]

This link may be of use
Municipal Securities Rulemaking Board::EMMA
I entered
"GENERAL OBLIGATION STATE" in the green Search window (upper right)
and got a curnucopia of state issued GO bonds.
Then I entered
"GENERAL OBLIGATION NEW YORK"
and got my state GO bond offerings.

 

[CarNut]

In ref to

I'll be curious to hear what options they present you with.

a few posts ago.
Well, my CD's expired and I meet w/my FA ?? (aka: salesman) with check book in hand to look for some 4-5 year maturity date tax exempt municipal bonds. It ended up a disaster, he could not find any short term that paid anything decent, had no idea of how to look at the resale market (not that he spent more than 10 mins trying) . And spent two hours trying to sell me annuities, mutual funds, high cost administration packages, guaranteed 5% a year packages that were 3% a year plus 5% up front, Unit investment trusts with 5% front end loads, etc, etc. This guy was a snake oil salesman from the get-go. I almost told him to start reading this forum as he might learn something. I ended up with a headache and walking out with my check book in hand no money invested. I'm still looking..

 

[afntrn56]

Don't forget about Pen Fed. Still offering 4% on a 5 year CD that you can cash in any time for a 6 month interest penalty.

I see a lot about Pen Fed but unfortunately I don't seem eligible to invest with them. Anyone else have this problem or know how to be eligible?

 

[REWahoo]

I see a lot about Pen Fed but unfortunately I don't seem eligible to invest with them. Anyone else have this problem or know how to be eligible?

See #7: https://www.penfed.org/howToJoin/overview.asp