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SeattleRocks · 10-19-2019, 11:10 AM

I did a search on the site and didn't see anything specific to my question so I created a thread.

What is the forum's thoughts about investing new money in muni bond funds today with interest rates possibly going lower and some saying a recession is on the horizon (who knows...)

I have been researching BlackRock Muni Yield and Invesco Muni Investment Grade funds and like what I see. Thinking long term, set and forget investment in these as part of my portfolio as I am in a high tax bracket.

Not asking for a portfolio review, just would like other's opinions about investing in Muni funds today for new money. I have about $500K in new money I am eyeing for this investment.

Thanks to the forum for any thoughts.

COcheesehead · 10-19-2019, 12:24 PM

I am more of a muni bond ladder guy. I think they offer some advantages for creating targeted income dates and avoiding NAV erosion if rates rise. They have built in regular liquidity if you need it and if you are disciplined with them, you should get nice returns. I would use the tools that firms like Fidelity offer for building and managing ladders to get close to the low maintenance that you desire.
My ladder throws enough enough monthly cash flow that I don’t need to keep much, low yielding cash on hand which I think helps my overall returns too.
I also have been buying a closed end muni fund with a portion of my “risk” money since the yield is in the high 4% range, but they can be volatile.

Mr._Graybeard · 10-19-2019, 01:48 PM

Quote:

Originally Posted by COcheesehead

I am more of a muni bond ladder guy. I think they offer some advantages for creating targeted income dates and avoiding NAV erosion if rates rise. They have built in regular liquidity if you need it and if you are disciplined with them, you should get nice returns. I would use the tools that firms like Fidelity offer for building and managing ladders to get close to the low maintenance that you desire.
My ladder throws enough enough monthly cash flow that I don’t need to keep much, low yielding cash on hand which I think helps my overall returns too.
I also have been buying a closed end muni fund with a portion of my “risk” money since the yield is in the high 4% range, but they can be volatile.

I agree on the bonds vs. funds, although I think the sweet spot for munis has passed for now. Government agencies are not borrowing a lot, which depresses the yield of muni bonds that are out there. I have a lot of muni bonds, but I haven't bought more than one or two since 2017.

I've found that hospital bonds deliver the best bang, but the financial plight of many rural hospitals these days makes due diligence a must. I also like airport bonds when I can find them.

Four percent on a closed-end muni bond fund sounds pretty sweet.

COcheesehead · 10-19-2019, 02:13 PM

Quote:

Originally Posted by Mr._Graybeard

I agree on the bonds vs. funds, although I think the sweet spot for munis has passed for now. Government agencies are not borrowing a lot, which depresses the yield of muni bonds that are out there. I have a lot of muni bonds, but I haven't bought more than one or two since 2017.

I've found that hospital bonds deliver the best bang, but the financial plight of many rural hospitals these days makes due diligence a must. I also like airport bonds when I can find them.

Four percent on a closed-end muni bond fund sounds pretty sweet.

This goes back to my comment above about discipline. The ladder forces you to buy the long rate. Years ago when everyone said rates were going up, I was buying 5% coupons, double tax free. I thought I was going to get killed in the future, but I am pretty happy that I held my nose and kept buying.
If you stay true to the strategy and rates go down, you look good. If rates rise, you always have maturing bonds to reinvest.
I am not a huge fan of single project bonds. It increases your risk. General obligation (GO bonds) have more streams to get income from. Single project only has one.

jazz4cash · 10-19-2019, 03:20 PM

I’m not finding individuals issues at attractive yields so I’m buying a few shares of single state muni fund each month. The yield bests any high yield MM even without the tax benefit but it’s not 4%.

COcheesehead · 10-19-2019, 03:57 PM

The closed end fund is PMF. I am not recommending it. It’s not for the faint of heart. It uses leverage and derivatives, but it’s yield is 4.7%.

SnowballCamper · 10-19-2019, 05:47 PM

I held a muni fund for a while. I was surprised to get a tax bill for the capital gains within the fund... maybe I didn't know what I was doing. I doubt my income will be high enough anytime soon to go back to muni bonds, but I'll do individual issues if I do.

COcheesehead · 10-19-2019, 05:48 PM

Quote:

Originally Posted by SnowballCamper

I held a muni fund for a while. I was surprised to get a tax bill for the capital gains within the fund... maybe I didn't know what I was doing. I doubt my income will be high enough anytime soon to go back to muni bonds, but I'll do individual issues if I do.

The interest is tax free and for some lower incomes, the cap gains may be as well. Though if you have income low enough for zero cap gains, you probably don’t need a muni.

Mr._Graybeard · 10-19-2019, 07:21 PM

Quote:

Originally Posted by COcheesehead

I am not a huge fan of single project bonds. It increases your risk. General obligation (GO bonds) have more streams to get income from. Single project only has one.

That's the mantra. But GO bonds from some financially troubled issuers (Detroit, Puerto Rico) have shown greater volatility than revenue bonds with a dedicated revenue stream. Peter Hayes of Blackrock Inc. makes this argument: The case for favoring revenue bonds over general obligation bonds

It's no secret that the City of Chicago is in some tough financial straits. But O'Hare revenue bonds are A-rated. O'Hare International Airport doesn't have the same political pressures as the city that operates it. If revenues fall, it can bump up user fees with little outcry.

SeattleRocks · 10-19-2019, 07:46 PM

This is super helpful. Very much appreciate it. I am going to do some homework on individual bonds. I have both Vanguard and Fidelity so I am set there.

jazz4cash · 10-19-2019, 07:49 PM

I maybe need to find a muni bond alert program better than the one I’m using at Fidelity. I’m not finding much in the way of GO issues at all. Hospital, education, toll road, airport, water, etc revenue bonds are more attractive to me. Also gotta watch for taxable muni bonds esp for stadium construction.

COcheesehead · 10-19-2019, 08:01 PM

Quote:

Originally Posted by Mr._Graybeard

That's the mantra. But GO bonds from some financially troubled issuers (Detroit, Puerto Rico) have shown greater volatility than revenue bonds with a dedicated revenue stream. Peter Hayes of Blackrock Inc. makes this argument: The case for favoring revenue bonds over general obligation bonds

It's no secret that the City of Chicago is in some tough financial straits. But O'Hare revenue bonds are A-rated. O'Hare International Airport doesn't have the same political pressures as the city that operates it. If revenues fall, it can bump up user fees with little outcry.

Cherry picking the worst, doesn’t make you right.

Mr._Graybeard · 10-19-2019, 08:30 PM

Quote:

Originally Posted by COcheesehead

Cherry picking the worst, doesn’t make you right.

It doesn't make me wrong, either.

One thing about munis that I like over corporate debt is that the operations of the issuers are generally pretty transparent. News media cover the finances of government, so some googling can turn up some interesting information about the debtor.

Some bonds from Coralville, Iowa, were on the secondary market last year, and they were priced attractively. A little town in conservative Iowa -- better yet, a suburb of a university town. I was interested ... until I read news reports about the heavy debt load the city was operating under. Financing for an arena project had cost the city its investment-grade bond rating. https://www.bondbuyer.com/news/coral...-for-new-arena

On the plus side, the city's financial condition is newsworthy, so anyone interested in investing in Coralville debt and make a sound judgment. I took a pass.

COcheesehead · 10-20-2019, 08:00 AM

This is another great site for muni bond info. You can search for material events on any bond. Call dates, prefunded issues (defeasance) which if you can find them makes your bonds instantly AAA.
https://emma.msrb.org/

njhowie · 10-20-2019, 08:01 AM

As interest rates continue to dwindle and the chase for yield intensifies, folks are taking more risk to secure some return. It is beginning to be unjustified and muni investors need to understand when it is not prudent to be purchasing. It is time to be extremely picky when purchasing individual municipal bonds. It does not make sense to be purchasing 3% and 4% (taxable) munis when you have to go out 20 years or more. In the tax free space, yields across the spectrum, with any modicum of quality are well below 2%, many times even below 1%. It makes little sense in owning these, when you can get better returns with CDs, even forfeiting the tax benefits of the tax free muni.

Before purchasing any individual municipal bond at this time, the investor should take the time to review and understand the official statement (equivalent of a stock offering prospectus), and the continuing disclosures (historical audited financials and reports).

Those who simply opt to accept S&P and Moody's ratings on the bonds to satisfy their need for safety may find themselves disappointed as the ratings can, and likely will trend lower as economic conditions weaken, municipal obligations increase, and budgets are busted.

If you are purchasing revenue bonds, you need to be darn sure that the revenue source does not have the potential of drying up over their remaining term. Generally, those bonds are unsecured - they are not backed by any asset, and are solely payable from the revenue source. When you review the official statement, you'll generally find big bold print indicating this.

Quote:

Originally Posted by SeattleRocks

This is super helpful. Very much appreciate it. I am going to do some homework on individual bonds. I have both Vanguard and Fidelity so I am set there.

Spend the time to become very familiar with emma.msrb.org. Take the CUSIP of any municipal bond and look it up there. Then review the official statement, and a few of the annual audited financial reports and economic reports provided by the municipality. Learn how to identify potential issues that could be risks down the road. Look up the information for a mid/high A-rated issue and then do the same for a mid/high B-rated issue and study it until you are comfortable that you can identify why one is rated differently from the other.

While interest rates are so low, and possibly go lower, the risk/reward argument in favor of municipal bonds is not so persuasive. The fact that the sector is coming up more in articles and discussions is more an indication that the best of times has passed. A year ago when all the talking heads were saying how stupid it would be to own bonds while rates were rising - that was the time to be purchasing. Today, with those same folks now convinced that rates are headed to zero and possibly negative - it's become too crowded in the muni space. If anything, it's time to be pruning holdings which have appreciated significantly, as yield to maturity is currently quite low and probably not worth taking the risks for holding for many issues.

Quote:

Originally Posted by jazz4cash

I maybe need to find a muni bond alert program better than the one I’m using at Fidelity. I’m not finding much in the way of GO issues at all. Hospital, education, toll road, airport, water, etc revenue bonds are more attractive to me. Also gotta watch for taxable muni bonds esp for stadium construction.

Go to emma.msrb.org, create a free account there, and then you can create savable queries. They provide significantly more parameters to query on than Fidelity and the other brokerages. However, there is not an alert mechanism - you need to manually run the query from their site. The other issue doing that is that it locates municipal bond issues for you, it's not going to tell you if Fidelity (for instance) currently has it in its inventory or a dealer is offering it. You may be able to increase the odds of this, you can include additional parameters around what's been trading recently, and possibly what's had events/filings recently. Generally, I will scan what Fidelity is offering, then go to msrb.org to further investigate anything which I find interesting, and then decide if I'm still interested.

If you are looking at a municipal bond on Fidelity's site, and you go to the bond details screen, on the right hand side on the top, under "Official Municipal Documents" is a link to "Offering Statement (PDF)" - this will take you directly to the bond page at emma.msrb.org.

njhowie · 10-20-2019, 08:12 AM

Quote:

Originally Posted by COcheesehead

This is another great site for muni bond info. You can search for material events on any bond. Call dates, prefunded issues (defeasance) which if you can find them makes your bonds instantly AAA.
https://emma.msrb.org/

With the new tax laws, there will be no new pre-refunded issues going forward. There are still some existing pre-refunded issues out there (I have many at under 2 years and one which matures in 2029 that couldn't be called), but any you find will have yield to call/maturity which are even lower. If you can/do find one yielding more than equivalent maturity CD, then grab it.

Insights | Western Asset

COcheesehead · 10-20-2019, 08:46 AM

Quote:

Originally Posted by njhowie

With the new tax laws, there will be no new pre-refunded issues going forward. There are still some existing pre-refunded issues out there (I have many at under 2 years and one which matures in 2029 that couldn't be called), but any you find will have yield to call/maturity which are even lower. If you can/do find one yielding more than equivalent maturity CD, then grab it.

Insights | Western Asset

I wasn’t aware they were taking the dessert off the table. I just had a 2027 bond prefunded last week. When does the new law go into effect?

njhowie · 10-20-2019, 03:43 PM

Quote:

Originally Posted by COcheesehead

I wasn’t aware they were taking the dessert off the table. I just had a 2027 bond prefunded last week. When does the new law go into effect?

That's a really good question. I went on emma and ran my query to fish out the new pre-refunded issues and it seems as though they are still doing them - even going out to 2024 and 2025 on the redemption dates.

It may be the case that the new law has to do with issuing new debt to refund the old debt, and maybe they are simply paying off the old debt with cash on hand instead of issuing new debt? Or maybe they've found a loophole to work around it? I'll try to check into this more if I get some free time during the week.

Thanks.

COcheesehead · 10-20-2019, 04:47 PM

Quote:

Originally Posted by njhowie

That's a really good question. I went on emma and ran my query to fish out the new pre-refunded issues and it seems as though they are still doing them - even going out to 2024 and 2025 on the redemption dates.

It may be the case that the new law has to do with issuing new debt to refund the old debt, and maybe they are simply paying off the old debt with cash on hand instead of issuing new debt? Or maybe they've found a loophole to work around it? I'll try to check into this more if I get some free time during the week.

Thanks.

You are the bond king of this forum.