muni bonds are poised for serious problems

[rsingh6675]

I went on vacation & my PMM is down 13%. AFB is also down. Any opinions if I should hang on to these or get out?

[REWahoo]

Quote:

Originally Posted by rsingh6675 I went on vacation & my PMM is down 13%. AFB is also down. Any opinions if I should hang on to these or get out?

No advise on whether to hold or sell, but I would suggest you might not want to take any more vacations...

[DeborahB]

I didn't see the 60 minutes segment. But generally I'm willing to take risk in short-term bonds, for large gains. I tend to buy bonds that will mature in 2 - 4 years, at a discount that ends up with a good yield. 8% and up.

If you're afraid of risk, this is not a good approach.

[SunsetSail]

Quote:

Originally Posted by REWahoo No advise on whether to hold or sell, but I would suggest you might not want to take any more vacations...

Funny. This reminds me the reverse causality quip in economics: Every year before winter people in the Northeastern United States put storm windows on their houses and then come winter they face harsh weather conditions. I don't know why they don't just stop putting storm windows on their houses...

[haha]

Quote:

Originally Posted by SunsetSail Funny. This reminds me the reverse causality quip in economics: Every year before winter people in the Northeastern United States put storm windows on their houses and then come winter they face harsh weather conditions. I don't know why they don't just stop putting storm windows on their houses...

Many masochists in that part of the country. No other reason to be there.

Ha

[JBmadera]

she did a follow up interview on CNBC this morning. Unsettling, to say the least.

[brewer12345]

Quote:

Originally Posted by JBmadera she did a follow up interview on CNBC this morning. Unsettling, to say the least.

Or maybe she is just another bimbo desperate for attention so that her 15 minutes of fame don't end on schedule.

[veremchuka]

she did another interview at 3:30 with maria bartoromo. cities and states can't print money like the feds can. if they go bankrupt wouldn't their bonds be worthless? bonds are in your portfolio for stability not to provide juicy returns, taking risk is done with equities. munis seem very dangerous.

[brewer12345]

Quote:

Originally Posted by veremchuka bonds are in your portfolio for stability not to provide juicy returns, taking risk is done with equities.

Munis aside, this is a big misconception. Under the right circumstances it is quite possible to generate equity-type returns with bonds, usually with less volatility than equities. You should always be on the lookout for big potential returns, regardless of the instrument. If you could lock in a double digit return via a 5 year bond issued by a stable, investment grade issuer, wouldn't you find that exceedingly attractive? So what if it isn't an equity.

[79protons]

Quote:

Originally Posted by brewer12345 Munis aside, this is a big misconception. Under the right circumstances it is quite possible to generate equity-type returns with bonds, usually with less volatility than equities. You should always be on the lookout for big potential returns, regardless of the instrument. If you could lock in a double digit return via a 5 year bond issued by a stable, investment grade issuer, wouldn't you find that exceedingly attractive? So what if it isn't an equity.

Which has more risk? A bond from a city in Illinois or stock in a company like Coca Cola, Walmart, or Mcdonalds?

[Rambler]

I'm not selling. Of course I will keep an eye on them, but I'm not too worried. I'm more likely to snatch up more as the prices go down and the yields go up.

R

[harley]

Quote:

Originally Posted by haha Many masochists in that part of the country. No other reason to be there. Ha

Other than that it's a long way from California.

[freebird5825]

Quote:

Originally Posted by haha Many masochists in that part of the country. No other reason to be there. Ha

Quote:

Originally Posted by harley Other than that it's a long way from California.

You guys crack me up!

[brewer12345]

Quote:

Originally Posted by 79protons Which has more risk? A bond from a city in Illinois or stock in a company like Coca Cola, Walmart, or Mcdonalds?

Almost certainly the equity has higher risk, although at the moment relative prices of the bonds vs. the equities likely compensate you for this. But bond markets, especially smaller ones, throw up highly profitable anomalies from time to time and we should be prepared to grab them. Its easier to spot the opportunities in bond markets because all you have to do is figure out if the issuer can stay enough in one piece to pay you off. Equities are much tougher.

[scrabbler1]

I have been in two muni bond funds since the early-mid 1990s. One is a national (intermediate-term) bond fund and the other is a single-state (long-term, New York) bond fund.

Both funds had their NAVs took a big hit in 2008 and into 2009 before rebounding well into 2010 even though the monthly dividend yields have dropped a little. The NAVs are back down to where they were about one year ago.

A national muni bond fund is more diversified than a single-state fund, of course, so one or two states having problems is not going to affect the overall fund a whole lot. But I would be a little nervous about investing in a single-state fund if that state is having more problems than most others. In the 60 Minutes segment, Illinois was singled out as a state with some extraordinary issues. (I don't live in Illinois so it is not a fund I would not buy into it; my national fund has only 2.1% of Illinois bonds.)

On the local side, my county (Nassau) had some fiscal problems about 10 years ago and the state stepped in with some aid along with an oversight board. The bond rating went down but remained at the low end of investment grade. With a new administration, the bond rating recovered over the years since then but with another new administration in place last year some of the old fiscal practices from the 1990s which got us into the mess have begun to resurface, drawing extra attention from the oversight board (which has the power to become a control board). [I don't know of an oversight board type of relationship between the feds and the states should a state get into trouble the way my county did.]

A locality in some trouble fiscally can present a good buying opportunity. My parents bought a single 15-year coupon bond ($10k) for Long Island's Suffolk County back in the mid-1980s when Suffolk had some fiscal problems and saw its bond rating downgraded. It had an interest rate of about 8%, not bad for a muni. Suffolk got its act together and the bond paid about $400 every 6 months for 15 years without any problems.

[MichaelB]

Quote:

Originally Posted by 79protons Which has more risk? A bond from a city in Illinois or stock in a company like Coca Cola, Walmart, or Mcdonalds?

+1 on what Brewer said.

This is one of the problems with the muni market. It is broader than the sum of corporate investment grade + junk + emerging market + developed country sovereign. Having Florida development districts in the same category as State of Florida and Yankee stadium parking garage doesn’t make sense. That means generalities about “the muni market” also don’t make sense.

One final comment. There is a recent Dan Fuss radio interview with Consuelo Mack (promoting a paid subscription service, this interview is free). Fuss was investing in bonds before Meredith Whitney was born and is without any doubt a real expert on the subject. I would choose his advice over hers without hesitation. Anyone concerned about their bond investments should listen. Link here Home - Consuelo Mack WealthTrack Extra

[79protons]

Quote:

Originally Posted by brewer12345 Almost certainly the equity has higher risk, although at the moment relative prices of the bonds vs. the equities likely compensate you for this. But bond markets, especially smaller ones, throw up highly profitable anomalies from time to time and we should be prepared to grab them. Its easier to spot the opportunities in bond markets because all you have to do is figure out if the issuer can stay enough in one piece to pay you off. Equities are much tougher.

It is not only default risk in a muni bond you need to worry about, but rising interest rates. A 1% increase in interest rates will have a much larger detrimental effect on the principal.

I am also not sure if a lot of cities could remain current on their bond payments if Coca Cola, Walmart and Mcdonalds all suddenly went bankrupt.

So really, I am not so sure what has more risk.

[MichaelB]

Quote:

Originally Posted by 79protons It is not only default risk in a muni bond you need to worry about, but rising interest rates. A 1% increase in interest rates will have a much larger detrimental effect on the principal. I am also not sure if a lot of cities could remain current on their bond payments if Coca Cola, Walmart and Mcdonalds all suddenly went bankrupt. So really, I am not so sure what has more risk.

The question was risk, not return. BTW, it was not an equitable comparison. Better would be Coca Cola stock vs NY State bond. The risk from the bond is lower - which is why the potential return is higher for the stock.

[brewer12345]

Quote:

Originally Posted by 79protons It is not only default risk in a muni bond you need to worry about, but rising interest rates. A 1% increase in interest rates will have a much larger detrimental effect on the principal. I am also not sure if a lot of cities could remain current on their bond payments if Coca Cola, Walmart and Mcdonalds all suddenly went bankrupt. So really, I am not so sure what has more risk.

That is truly a stunning series of non sequiturs. You should print it out and frame it.

If I can buy a good quality muni at double digit yields and stay within a 10 year maturity limit, I will not be worrying too much about interest rate risk. If I were worried about interest rate risk, I would hedge via treasury ETFs or more likely puts on same.

[79protons]

Quote:

Originally Posted by brewer12345 That is truly a stunning series of non sequiturs. You should print it out and frame it. If I can buy a good quality muni at double digit yields and stay within a 10 year maturity limit, I will not be worrying too much about interest rate risk. If I were worried about interest rate risk, I would hedge via treasury ETFs or more likely puts on same.

I don't understand why you are saying my statements are illogical.

First off, you can't buy a good quality muni at double digit yields, so that statement by you is illogical.

I think pointing out that bonds suffer from interest rate risk when current rates are absurdly low is a valid arguement. Stocks offer some protection from rising interest rates, bonds offer nothing there.

My last statement was sort of tongue in cheek, but it pointed out that in the event of such a horrible economy that caused staples like Walmart, Coke, and McDonalds to go belly up would be an economy where the repayment of municipal bonds would be a last priority. How much rioting would there be if you raised taxes during a time of 25% unemployment?

I am not saying that muni bonds will be defaulted upon, but I am also saying there is very little market risk in owning a mix of large cap value companies paying a nice little divy. I personally believe the equity has slightly lower risk than the bond, in today's market.