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FIREd · 06-22-2008, 04:23 PM

Hello,

I would like to buy individual municipal bonds for my taxable account. My taxable money is at Vanguard but I find the prospect of buying individual bonds (and/or CDs for that matter) though them rather daunting. I suppose I could use one of VG's muni funds but I like the idea of locking in a fixed yield for several years.

Does anyone have any experience in that area? I have many questions like: how do you know a particular bond is AMT exempt? What's a sinking fund? Besides the possibility of an early call, what other limitation should I look for? I plan on buying only AAA-rated munis that are insured (for whatever that's worth nowadays).

Thanks for your help...

Disappointed · 06-22-2008, 07:03 PM

Please read "Bonds - The Unbeaten Path to Secure Investment Growth", by Richelson&Richelson.

My account is at Fidelity. I signed up for an alert on CA munis, they will email me whenever there is new isuue (there is one currently). NO commission on new bonds.

On the secondary market, Fido charges $1 per bond (each bond is $1000). They may also mark up the bond prior to selling it to us. New issue is at whatever it is priced at by the market.

You should contact the fixed income desk at Vanguard and ask them, or perhaps check out their website and see if they have a bond desk.

FMSbonds.com (muni bond trader - secondary) and investinginbonds.com are two other sources of education on bond.

Fido may also have a tutorial on Bonds. Go to Fidelity.com -> Research -> Fixed Income -> Muni Bond.

Other alternatives are mutual funds and Closed End Funds, but I would not recommend CEFs at this point due to a turmoil in leverage financing part of the muni CEFs.

mP

clifp · 06-22-2008, 07:13 PM

I've have not purchased Muni bonds through Vanguard, but I just got finished using their online search facility to compare Vanguard bonds to Schwab. I was pleasantly surprised to see the wide inventory of bonds available at Vanguard.

Unfortunately, the collapse of MBIA, AMBAC and other Muni bond insurers have made the process of buying muni bonds more complicated. In the past you just picked a state, a maturity, and you got a couple of choices of bonds, paid the commission, collect the coupons, and marveled at tax time how much taxes you saved, and slept easily.

The bad news is now days you have to look at the underlying issue rating (since insurance other than from Berkshire is basically worthless) and check to see the AMT status, make a judgement about isecure s the revenue from an Airport, Sewer system, Hospital safe, or should I stick with General Obligations bonds. So yes it is rather daunting.

The good news is the Vanguard bond search tool and bond calculator is pretty powerful and easy to use. You can specific maturities, credit ratings, AMT status, call feature etc. I also have found picking up the phone the bond desk at Schwab to be extraordinarily helpful. They have been more than willing to take the time to explain all my question as well as steer me in the right direction. I am guessing that Vanguard is similarly helpful. If not I can tell you that Schwab's bond commissions are lower than Vanguards.

I am somewhat similar situation. One of my largest Muni bond holding is being call July 1, and I am trying to figure out how to replace the 5% tax free income that it generated. Unfortunately getting 5% now days require lower my credit standards or lengthening my maturity. Given the prospects for both interest rates and inflation, and I am less than thrilled locking in 5% for more than 10 years.

FIREd · 06-22-2008, 07:51 PM

Thanks Disappointed and Clifp,

I had been playing with Vanguard's Bond search tool but I did not see the "AMT exempt" option. Now that I found it it's really much clearer! Vanguard does have a fixed income desk I could call but I didn't want to sound like a complete idiot when I called! I wanted to understand the basics before doing anything else. I do intend to buy the most highly rated bonds regardless of insurance. But so far the only AAA rated bonds I have found that pay 5% yield are 30 year bonds, much longer than I would have liked. The yield on bonds maturing in 7-10 years seems to max out at 4%...

I will keep looking and learning. Thanks.

clifp · 06-23-2008, 02:05 AM

If you are willing to drop down to AA bonds I found a few that yield 5% with a 10 year duration, but I feel your dilemma. Vanguard will charge $5/bond or $3/bond over 50K, make them earn their commission. I spent easily hour talking to the folks at Schwab the first time I bought Muni bonds over several calls. There is a lot to learn, especially in todays market without insurance to bail you out if you make a mistake. (Still the default rate for even BBB rated Munis is roughly equivalent to AAA corporate so don't sweat the credit risk too much.)

You know too much to sound like idiot, and the folks at Vanguard get paid to know this stuff. Questions you do want to ask are about the call provisions, sinking funds, and the revenue source. But I honestly would say "I've never bought Muni bonds I familiar with basic bond principals, but please tell me what I need to know, if you call after hours they'll probably be helpful."

brewer12345 · 06-23-2008, 08:16 AM

If you want to stay on the safe side of things now that bnd insurance is questionable, stick to general obligation bonds issued by individual states or large cities.

ziggy29 · 06-23-2008, 08:39 AM

I would agree with Brewer that GO bonds are the way to go now. Also, if you can, learn about their pension and retiree health care obligations. Those are ticking time bombs for many states, counties and cities.

Art G · 06-23-2008, 10:24 AM

Go with a broker{waiting for all the boos to subside}....
There is so much to know about a bond other than its' rating and whether or not it's an AMT bond. You need to know what's backing them, if they have an extraordinary call feature, if they can be called even if there isn't an extraordinary call feature, if they have a death put option, underlying rating, now you even have to research whether or not there is some derivative product behind the bond.
The current insurance companies are going through a period of being re-rated themselves and there's a good chance your insurance may mean little.
Then there's always the consideration of what you're truly paying for that bond. Sure, Vanguard charges you X, but how much did the trader mark them up first? How well did the trader buy those bonds in the first place? Is he dumping them seemingly cheaper because he knows there's a problem with the backing? If you want to sell those bonds, how much is Vanguard going to shop those bonds, or do they have bond traders who will pay up for those bonds?
This is one of those products that may well be worth having a professional's (one that you trust)assistance on. I almost bought some last week, until I discovered there is all sorts of leverage against them. There are tons of these currently, they are energy bonds issued from many states. JMO

REWahoo · 06-23-2008, 10:40 AM

Quote:

Originally Posted by Art G

Go with a broker{waiting for all the boos to subside}....

I'm sorry but I've seem to have forgotten - you work as a _____________?

FIREd · 06-23-2008, 10:42 AM

Thanks Art G,

I also found out that one of the largest (and seemingly richest) county in my state is rumored to be on the verge of filing for bankruptcy, so I also have to navigate around that as well (it may account for the negative credit watch that showed up for those bonds on Vanguard's search tool).

http://www.nytimes.com/2008/03/12/business/12bama.html

So I agree that things are a bit more complex than it seems at first. But I really would like to keep my money at VG. I will call their fixed income desk and see if they can give me more details about the bonds I am interested in, included all those things outlined by people who replied to this thread. If I don't feel completely comfortable with the answers I get, then I may go with a muni fund instead...

Art G · 06-23-2008, 11:31 AM

Quote:

Originally Posted by REWahoo

I'm sorry but I've seem to have forgotten - you work as a _____________?

I'm curious as to whether or not you quiz your doctor the same when he makes a recommendation.
"Sorry doc, but you think I should have that cancerous looking mole looked at?...and what occupation are you in again? I believe I can make my own determinations just by reading the internet!"

REWahoo · 06-23-2008, 11:40 AM

Quote:

Originally Posted by Art G

I'm curious as to whether or not you quiz your doctor the same when he makes a recommendation.

When I pay a visit to my doc, I'm reasonably sure I know who's giving me advice. When a "head & shoulders" guy (no, not the shampoo!) tells the OP to use a broker, I'm a bit more skeptical.

But that's OK, you don't have to answer.

BTW, I don't disagree with the "make sure you have all the information" advise you gave, only the recommended source. I think the OP's plan to talk to the folks at Vanguard is an excellent alternative.

Art G · 06-23-2008, 12:24 PM

If you go to the emergency room of a hospital, you have no idea who the doctors are, and yet they're giving out life and death advice daily.
Oh well, I gotta go, I'm busy building my own car. GM's not gonna make profit on me when I can build my own car from scratch! After all, I have no idea who put my last car together. I think I'll raise my own cows also, I want to know what's going into my steaks!

REWahoo · 06-23-2008, 12:28 PM

...once again, avoiding answering a simple question.

brewer12345 · 06-23-2008, 12:28 PM

Quote:

Originally Posted by Art G

I'm curious as to whether or not you quiz your doctor the same when he makes a recommendation.
"Sorry doc, but you think I should have that cancerous looking mole looked at?...and what occupation are you in again? I believe I can make my own determinations just by reading the internet!"

Wow, you mean brokers started taking the Hippocratic Oath? The SEC really has gotten serious about regulation.

Art G · 06-23-2008, 12:42 PM

Quote:

Originally Posted by brewer12345

Wow, you mean brokers started taking the Hippocratic Oath? The SEC really has gotten serious about regulation.

LOL! So that's how you find a good doctor, because we all know there are no bad or unethical ones. After all, graduating from the University of Haiti is just as good as graduating from John Hopkins.
Some of you guys are just so desperate to slam the broker that all matters of logic go out the window. Every day I read on here free advice and much of it from strangers and often times wrong, but because it's free, it's all ok. We're all friends here. Hey, I'm just giving out my free advice like the next guy. Don't seek out professional advice ever! The internet articles written by strangers will do just fine, and what the heck, if you bought $100k in a muni bond that goes default, I'm sure brewster will make it good.