Municipal bonds today

[Ready]

I have $300K sitting in cash that just matured from a 3.5% CD. With CD rates so low I don’t want to tie up the money to earn around 1%. Most of my fixed income is in California Municipal Bonds (VCADX).

I’m wondering what the general consensus is on buying these funds today. The NAV today is $12.38, which is close to a 52 week high. Interest rates can’t really go down much more. If they go up the funds NAV will go down. The 30 day yield is .7%. With tax savings it’s the equivalent of maybe 1%.

Is there any upside to buying more of these today or am I just stuck buying at a time when interest rates are at historical lows and any rise in rates is going to negatively impact the performance on an already underwhelming current yield?

 

[twaddle]

Isn't the "general consensus" exactly what the yield curve will tell you? The market appears to be saying "don't expect rates to rise much."

Duration is relatively short, so you won't get beat up too terribly if the market is wrong.

 

[jazz4cash]

I have a similar single state muni that I use instead of a MM fund but I do not reinvest the dividends. I use the distribution yield to asses the fund which, like VCADX is over 2%

 

[Koolau]

It's possibly more risk and definitely less flexible than Munis, (and taxable) but you could look at SPDA (Single Premium Deferred Annuity) from an insurance co. I think we're calling them something else now, but I forget the new name. Anyway, they are paying in the 3+% range (I think - that's what DW got) for a 3 year commitment IIRC. I look at these as "CDs backed by an insurance do." Big thing is due diligence on the particular insurance co. As always, YMMV.

 

[DrRoy]

Mostly you are stuck. You could look into a ladder of individual bonds, and then hopefully roll them into something at a higher rate as they mature.

 

[aja8888]

Mostly you are stuck. You could look into a ladder of individual bonds, and then hopefully roll them into something at a higher rate as they mature.

Let's face it....we are all stuck with nowhere to park cash and get much more than 1% and have some degree of safety.

 

[Richard4444]

Let's face it....we are all stuck with nowhere to park cash and get much more than 1% and have some degree of safety.

Agreed, so I am making no long term fixed income moves, some one year CDs for safety and see where the World is then.

Rich

 

[Vincenzo Corleone]

Mostly you are stuck. You could look into a ladder of individual bonds, and then hopefully roll them into something at a higher rate as they mature.

I think there's a group of ETFs offered by Invesco that do just that.

https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-municipal-bond.html

The idea, if I'm not mistaken, is that one particular ETF will hold municipal bonds that mature in a given year. The ETF holds on to those bonds until maturity, at which time the investor can choose to keep the funds in the ETF, which will then end up holding new muni bonds that will mature in the following year. So if an investor wants to maintain a ladder of these ETFs indefinitely, it's seamless - the investor doesn't have to do anything after initial purchase.

From the website https://www.invesco.com/bond-ladder/

"A bond ladder is a time-tested strategy that provides continuous bond exposure through varied maturities. As holdings mature, the proceeds are reinvested into longer duration assets. Stop doing your individual bond work, and use this tool to see how BulletShares ETFs can do the work for you."

 

[pb4uski]

+1 I'm in capital preservation mode and not keep to deploy capital at such low interest rates. Staying short to avoid minimize interest rate risk and high quality to minimize credit risk.

Main holding for parked cash is VSGDX.. Vanguard Short-Term Federal Fund Admiral Shares... 0.73% SEC yield, 0.46% distribution yield, 1.8 year duration, 90% full faith and credit... best I can find.

 

[pb4uski]

I think there's a group of ETFs offered by Invesco that do just that.

https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-municipal-bond.html

The idea, if I'm not mistaken, is that one particular ETF will hold municipal bonds that mature in a given year. The ETF holds on to those bonds until maturity, at which time the investor can choose to keep the funds in the ETF, which will then end up holding new muni bonds that will mature in the following year. So if an investor wants to maintain a ladder of these ETFs indefinitely, it's seamless - the investor doesn't have to do anything after initial purchase.

From the website:

"A bond ladder is a time-tested strategy that provides continuous bond exposure through varied maturities. As holdings mature, the proceeds are reinvested into longer duration assets. Stop doing your individual bond work, and use this tool to see how BulletShares ETFs can do the work for you."

I've owned the corporate version of Bulletshares.... BlackRock also have versions... iShares iBonds. It is like owning a proportional interest in a portfolio of bonds that mature in a stated year.... similar to owning individual bonds but with better/easier diversification.

One thing to keep in mind is that the yield in that maturity year is usually pretty poor because as bonds mature over the course of the year the proceeds are invested in short-term paper until the terminal distribution in December... I sidestepped that nuance by selling near the end of the year before the maturity year or early in the maturity year.

 

[Ready]

Does the NAV of the Bulletshare funds change as interest rates change?

 

[pb4uski]

Yes, the NAV would change since the NAV is based on the value of the bonds in portfolio so if you want out before the maturity year there is still interest rate risk... it behaves just like an individual bond or portfolio of individual bonds would.

 

[Ready]

Yes, the NAV would change since the NAV is based on the value of the bonds in portfolio so if you want out before the maturity year there is still interest rate risk... it behaves just like an individual bond or portfolio of individual bonds would.

But if you hold until maturity you get back the exact amount you paid for the shares rather than the current NAV?

 

[Out-to-Lunch]

But if you hold until maturity you get back the exact amount you paid for the shares rather than the current NAV?

I am pretty sure that you get the current NAV, but that will converge to the underlying value of the bonds as the time to maturity vanishes. Just like a normal individual bond.

 

[phil1ben]

I am pretty sure that you get the current NAV, but that will converge to the underlying value of the bonds as the time to maturity vanishes. Just like a normal individual bond.

Am I correct to assume that most were initially issued at $25.00/share. If you buy in midstream and pay $25.60 and hold to the stated maturity then you would only get back $25.00/share not the $25.60 you paid?

 

[pb4uski]

Broadly speaking yes... the extra 60c that you paid is akin to buying a bond or bond portfolio at a premium with $25.00 being par so the 60c of premium reduces your net yield... just lik an individual bond.

 

[jazz4cash]

It's possibly more risk and definitely less flexible than Munis, (and taxable) but you could look at SPDA (Single Premium Deferred Annuity) from an insurance co. I think we're calling them something else now, but I forget the new name. Anyway, they are paying in the 3+% range (I think - that's what DW got) for a 3 year commitment IIRC. I look at these as "CDs backed by an insurance do." Big thing is due diligence on the particular insurance co. As always, YMMV.

They're called MYGA (Multi-Year Guaranteed Annuity) and I have been advocating for discussion of these as an alternative as CD rates continue dropping. The MYGA rates are also dropping and getting 3% for 3 yrs is probably in the rear view. I generally prefer individual bonds over funds but the muni bond funds are more attractive to me right now compared to individual bonds.

 

[Ready]

They're called MYGA (Multi-Year Guaranteed Annuity) and I have been advocating for discussion of these as an alternative as CD rates continue dropping. The MYGA rates are also dropping and getting 3% for 3 yrs is probably in the rear view. I generally prefer individual bonds over funds but the muni bond funds are more attractive to me right now compared to individual bonds.

It looks like you can get around 2.7% on a MYGA for a five year issue. The interest is tax deferred but ultimately you do have to pay taxes on it once the issue matures.

So it looks like they are comparable in rates to municipal bonds after factoring in the tax savings, but without the interest rate risk. Of course in theory bond funds could rise in value as well but given how low interest rates are that probably isn’t going to happen.

Has anyone purchase MYGAs here?

 

[PussInBoots]

You got to get used to losing money in your cash equivalents since after tax returns are below inflation.

It will be interesting to watch those investments should inflation pick up or bond rates go up (or both at the same time).

 

[pb4uski]

It looks like you can get around 2.7% on a MYGA for a five year issue. The interest is tax deferred but ultimately you do have to pay taxes on it once the issue matures.

So it looks like they are comparable in rates to municipal bonds after factoring in the tax savings, but without the interest rate risk. Of course in theory bond funds could rise in value as well but given how low interest rates are that probably isn’t going to happen.

Has anyone purchase MYGAs here?

IIRC there are a number of forum members who have purchased them recently. I haven't but am familiar with the from when I worked in the industry and the annuity line of business at my employer was part of my job responsibilities.

 

[jazz4cash]

It looks like you can get around 2.7% on a MYGA for a five year issue. The interest is tax deferred but ultimately you do have to pay taxes on it once the issue matures.

So it looks like they are comparable in rates to municipal bonds after factoring in the tax savings, but without the interest rate risk. Of course in theory bond funds could rise in value as well but given how low interest rates are that probably isn’t going to happen.

Has anyone purchase MYGAs here?

The issue I bought in December was 3.05 for 5 yrs A rated. It dropped to 2.5 right after I locked in but now it is 2.7 I think. These products offer some interesting features compared to CDs. You can lock in a rate and take 30 days or more to fund ( or shop for a better deal). Most have 10% per year withdrawals with no surrender fee. When the guarantee period ends, my contract continues to pay 1% without locking in for a new term while i look for a new home for my money. That's not terrible these days but hopefully rates will normalize in 5 years.

 

[Koolau]

They're called MYGA (Multi-Year Guaranteed Annuity) and I have been advocating for discussion of these as an alternative as CD rates continue dropping. The MYGA rates are also dropping and getting 3% for 3 yrs is probably in the rear view. I generally prefer individual bonds over funds but the muni bond funds are more attractive to me right now compared to individual bonds.

Thanks! I keep forgetting that name as SPDA just seems to roll of my tongue a lot easier - after 20 years! As I was trying to recall the acronym, the only thing that kept going through my mind was Mr. Miyagi, Mr. Miyagi, Mr. Miyagi - from KARATE KID. Not a useful memory trick. I'll have to try "My Georgia" or "My Gal." YMMV

 

[Koolau]

It looks like you can get around 2.7% on a MYGA for a five year issue. The interest is tax deferred but ultimately you do have to pay taxes on it once the issue matures.

So it looks like they are comparable in rates to municipal bonds after factoring in the tax savings, but without the interest rate risk. Of course in theory bond funds could rise in value as well but given how low interest rates are that probably isn’t going to happen.

Has anyone purchase MYGAs here?

Yes. As mentioned, I still have (okay, DW and I each have) SPDAs (the "old" version of MYGAs, I suppose.) They pay almost 5% so I keep them for ballast. Forgot to mention that these were originally structured as tIRAs. We eventually converted them to ROTHs - paying the taxes - but that's another story.

DW, about 2 years ago purchased one of the "new fangled" (probably just a name change from SPDA) MYGA. I think she got 3.5% and now that I think of it, I think it WAS 5 years. She had a TON of money in a variable life policy - her money producing vehicle was the stock market giving her ever more cash in the policy than the face value. I forget the details, but she was able to do a (I think this is correct) 1031 exchange? SO, what with adding some "spare" cash (0% interest in the check book) she ended up with non-taxable money earning taxable interest (i.e., she'll owe taxes only on the growth portion of the MYGA when she cashes it in.) Again, I sort of look at it as a CD backed by the full faith and credit of an insurance co. One thing I kind of like about these is, you can keep them in force as long as you like. I also have a bit of a quirk. I like to look at a given investment vehicle and KNOW that THIS SPDA (or now DW's MYGA) would fund one full year of ALL our current spending. It's maybe a bit like buckets, but it's more of a mechanism I use to insure that we're "okay" even if, say, the stock market suddenly tanks or my pension goes into default (the same time the PGBC throws up its hands and says "We're broke!)

The big downside to these vehicles (besides credit risk) are the withdrawal penalties which are substantial - not just loss of the interest you would have earned as in a CD. You CAN withdraw as much as you like whenever you like, BUT you pay a penalty if you step out of the contractual bounds. I don't recall the details, but there is a sliding scale of how much you can withdraw (penalty free) for each year of the contract. I wouldn't say I recommend these per se. It just seemed like a good idea at the time. We were (okay DW was) taking some winnings off the table and SHE was going through one of her "Cash Is King" phases at the time. Long story short, we're okay with the decision and realize it's not for everyone since YMMV

 

[catotx]

I bought quite a few MYGAs, starting last summer. I used them to replace matured CDs due to the dismal CD rates.

 

[stephenson]

I am still sitting in T - as a pseudo-alternative.