Bond Dividend Allocation

[jazz4cash]

Thanks for sharing your insights.

The issue I was referring to that was described as both GO (in the subtitle) and (Alternate Revenue) in the main title was your Sangamon IL Water Commission issue. I read a bit of the security details on pg 7 and it is a GO of the Commission, not of the State. I am not familiar with that usage of the term GO.

I'm going to bookmark your post #73 and study up on what constitutes a GO bond.

My gut instinct tells me there are good bonds available from places like IL, NJ, etc. but I am a long ways from being confident that I can find them. The Wellesley example you cited is interesting because I stumbled onto some issues from a prestigious private local high school. I was shocked that a private high school could qualify for muni status. I passed on them because I was unable to comprehend their finances. Maybe next time I will be more capable. Next time will be early '21 when a slug of CDs mature and I expect rates with still be terrible.

 

[njhowie]

Yes, when I went back and re-read your post, I saw what you meant in the call document - I must not have read it correctly the first time at 2AM.

The key point on GO is the pledge of full faith and credit. Yet, there can be twists - as with the water bond being called.

Here is a link to another bond I hold, which is a Parking Project Revenue Bond. However, reading through it, the city pledges full faith and credit to backstop it.

https://emma.msrb.org/EP790053-EP611884-EP1013418.pdf

Page 15:

The obligation of the City to make the payments required by the Agreement is a general obligation of the City, to which its full faith and credit and unlimited taxing power are pledged.

GO doesn't have to be of the state - it can simply be of the issuing municipality, whether that actually is the state, a city, a water commission, or a university.

 

[njhowie]

My gut instinct tells me there are good bonds available from places like IL, NJ, etc. but I am a long ways from being confident that I can find them. The Wellesley example you cited is interesting because I stumbled onto some issues from a prestigious private local high school. I was shocked that a private high school could qualify for muni status. I passed on them because I was unable to comprehend their finances. Maybe next time I will be more capable. Next time will be early '21 when a slug of CDs mature and I expect rates with still be terrible.

When investing in the muni space, just always keep in the back of your mind that safety is on your side. The fact that you are conscientious and digging in will just provide an additional level of safety. Remember the table in the Moody's report showing the default rate for rated municipal bonds over the past 50 years - that is what should make you confident in whatever bonds you ultimately buy - defaults are extremely rare - tiny fractions of a percent. Though we are in unique times, I do not believe that we are going to be seeing mass defaults taking place. Municipalities will take the necessary steps to make good on their obligations - whether it amounts to cutting services in the near-term, raising taxes, selling assets, or issuing additional bonds.

Use the resources which EMMA provides, and just read through lots of the audited financial reports, with a focus on the balance sheet and net position. After you go through a few of them very carefully, you'll see that they are almost all the same in content and format, as they are prepared by accountants and follow accounting standards. You'll get to the point where you can quickly jump to the financials, skim through it, and have a reasonable understanding within a few minutes - enough to make a decision that you want to investigate further, or there's no reason to waste any additional time on it.

Even though you won't be purchasing again until at least 6 months from now, don't let that stop you from continuing to get familiar and gain a deeper understanding. Look at the Fidelity inventory and think what you would buy if you did have money available today to invest in some. Take a few that appear interesting from querying, then go to EMMA, review the filings, and come to a conclusion if it would be what you'd buy if you had the funds. Also, I keep a spreadsheet of issues I have reviewed and then refer back to it when I do have money to invest. It's not uncommon that you will find a bond being offered that you had seen/reviewed in the past. I will quickly go down the list of CUSIPs on the spreadsheet, enter each of them and see if it's currently being offered.

 

[jazz4cash]

Yes, when I went back and re-read your post, I saw what you meant in the call document - I must not have read it correctly the first time at 2AM.

The key point on GO is the pledge of full faith and credit. Yet, there can be twists - as with the water bond being called.

Here is a link to another bond I hold, which is a Parking Project Revenue Bond. However, reading through it, the city pledges full faith and credit to backstop it.

https://emma.msrb.org/EP790053-EP611884-EP1013418.pdf

Page 15:


GO doesn't have to be of the state - it can simply be of the issuing municipality, whether that actually is the state, a city, a water commission, or a university.

I mis-spoke when I referenced obligation of the state. I meant municipal jurisdiction (e.g. city, state, county, etc.) vs a government sponsored entity (.e.g. University, water, waste, toll, or other agency) without access to revenue other than their primary revenue source. When I was working some customers from these self-financing entities, independent of state budgets, continued to order equipment right through every financial downturn. The pandemic has turned some of these normally reliable revenue generators upside down but I am confident holding to maturity will offset the volatility.

 

[Mr._Graybeard]

Thanks for sharing your insights.

The issue I was referring to that was described as both GO (in the subtitle) and (Alternate Revenue) in the main title was your Sangamon IL Water Commission issue. I read a bit of the security details on pg 7 and it is a GO of the Commission, not of the State. I am not familiar with that usage of the term GO.

This post reminds me of the first individual muni bond I purchased, from the Xenia, Iowa, water district. It looked like a good buy at a relatively low premium, and I figured that rock-ribbed Iowans wouldn't default on their debts, so I jumped in. Over time I got more curious (a little late for that) and found that the City of Des Moines (IIRC) was annexing pieces of the Xenia district and attaching those customers to city water. That was leaving Xenia out on a limb financially, and its customers were facing a big rate increase to keep the system solvent.

I was a little anxious for a while, but eventually the rate hike was approved and life went on. Eventually the district called the bond.

The experience taught me what I consider a valuable lesson: Most government agencies are pretty transparent, and their operations are often in the news. If I had just done a news search for my debtor, I would have learned all about the structural money problems they faced.

 

[jazz4cash]

Good insight. Sometime the best resources come from plain old news and not necessarily fancy Financials. Issuers of muni debt seem to have a lot of levers to pull when problems arise.

 

[jazz4cash]

I think this thread should be merged with the muni bond thread.

 

[njhowie]

I transferred some cash but not enough to cover the dividend.
I transferred some more and it went through (instantly) at 109.3.

How's your local muni bond doing? I'm guessing market value has continued higher? I am getting disgusted as I look at muni prices daily - very depressing. Yields are minuscule and the dealers are getting very tight, they aren't budging on price any more. If I'm lucky I can get them 0.1 or 0.2 lower, peanuts, almost not worth working to get the better price as I've lost a few as others will step in and pay the ask. Even on stuff that they've been sitting on for months, they aren't coming down in price to sell.

In the next week I have a deluge of redemptions happening. I just received notification that JPM is calling the last "low yielding" CD have have with them at 1.5% bought 4 years ago. Maturity is in 3 months, but they couldn't even wait for that.

Over the past week, I have been able to find a few small lots of issues that have big yield to maturity with call dates in the next 6 to 12 months that will give yield to call of about 1% to 2%. It's really just pushing out the day of reckoning a little. Best case scenario - even if they do call, they don't do it immediately on the first call date, so at least I will be able to collect the bigger yield for a few months past the call date, bumping the effective yield a little. I fully expect every municipality and corp to take advantage of the low rates and refinance every last outstanding bond they have at/above 4%, down to under 4% for taxables and under 3% for tax free. I'm sticking to my guns and won't fall for anything not offering a reasonable chance to collect a decent yield over any extended period. For a couple years, I can live with a potentially low yield if there is the possibility of a big yield if not called. However, I will not accept a low yield to maturity over an extended period. Again, at the end of the day, it's still a bond, which comes along with the risk inherent in any bond.

I'll likely have lots of cash when the next major market downturn comes towards the end of the year, so at least there should be a good amount of equities of decent quality on sale at that time.

 

[COcheesehead]

I have relatively equal amounts of maturing muni bonds over the next 7-8 years. I doubt even by the end of this ladder will rates be that much higher.
If I go out 10 years I can get 2.4% - 3.5% AA - A quality as of this morning. I may just hold my nose and stick to the ladder process and keep reinvesting maturing issues, but pushing the duration out a bit further than I did before. Not sure yet. I don’t need anymore equities, but if we get another fire sale, that’s where I might put more into play.

 

[njhowie]

I doubt even by the end of this ladder will rates be that much higher.

The doomsday scenario is the wild card - if US keeps printing money, expanding debt load, increasing deficits and the rest of the world gets fed up enough to reconsider the USD being the world's reserve currency. Money printing and helicopter money ultimately lead to runaway inflation, interest rates get forced significantly higher, the Fed loses control.

 

[COcheesehead]

I just look at ‘08/‘09. Inflation was predicted as a result of that intervention, but other than a few notable examples, it never happened.

 

[njhowie]

As much as I hate myself for saying it, this time may be different.

As I recall, the 2008/2009 intervention was $700B to the banks, which was entirely repaid. Individuals and corporations got relatively little.

 

[jazz4cash]

My local tax-free muni price performance is exceeding my expectations, but I am not tempted to sell. They kick out interest payments in the May-Jul and Nov-Jan timeframe.

My single state fund is still paying over 2% but it's slightly underwater pricewise. I learned a valuable lesson on re-investing dividends but Fidelity is ignoring my revised request and continuing to reinvest for all my securities.

I've been getting a slug of new issue offers for my home state and the coupons are pathetic.....50-100 bp at par for 1-5 yrs taxable. Some others have astronomical pricing at issue (what's up with that?)

2.4-3.5% for 10 yrs AA/A quality ain't too bad. I'm also looking at these issues with great YTM but only decent YTW and I might do that if I needed to place some funds but a 3-5 yr MYGA seems to the best place for new funds right now. I'd have to weigh that against the hassle of a new account (unless I find one at Fido). Fortunately I won't have a need until early next year.

 

[njhowie]

Some others have astronomical pricing at issue (what's up with that?)

In the future, this is how they would pull off negative interest rates. They would never dare float a new issue with a negative coupon, so instead, they will scam naive investors with some psychologically acceptable coupon of maybe 2% or 3% and then price the bond at 110 or 120. You and I know that it's a farce, but Average Joe sees a great yield and isn't thinking about the consequences if held to maturity or if interest rates rise along the way. At some point, even this silly game won't be able to continue as folks wise up.

At this time, it is essentially gravy for the issuers. Sure, they pay a higher coupon, but they know the effective YTM is no different than if they priced the bond at 100 with the appropriate yield. However, the issuer gets the big benefit in that they can issue less debt - issuing $10 million of debt at 125 = 8000 bonds, or $8 million they will pay back at call/maturity. They get that $10 million today.

 

[njhowie]

I'm also looking at these issues with great YTM but only decent YTW and I might do that if I needed to place some funds...

These are what I've been buying as mentioned above. As long as that YTW is higher than comparable CD maturity, all else being equal, I see little reason not to go for it, unless we're looking at YTW significantly below 1% for any period of more than maybe 2 years. Again, remember that it is a bond and there are risks inherent in all bonds. The same way I do not care about the minimal difference in yield I sacrifice in keeping my cash in FCASH vs. SPAXX at Fidelity, I feel the same with the munis - at some point, the differential is so low that there is no sense in taking on any risk. I cannot, in good conscience, put any amount of money at risk in a muni, whether taxable or tax free if I know the maximum I will collect is 1% yield.

 

[jazz4cash]

I’ve got to study up on the mechanics of the initial offer price/coupon. I presumed the issuer chooses a yield and terms to balance the need to attract investors and fulfill their funding requirement. I assume they put juicy coupons on the issue and let the market price the offer. My 1st buy 5 yrs ago was an initial issue priced at par and I thought all new issues were sold at par. It was a 25 yr 4% coupon university hospital bond. I wish I’d bought more.

Sounds like I should also review the call dates for my holdings. I only have four.

 

[COcheesehead]

I’ve got to study up on the mechanics of the initial offer price/coupon. I presumed the issuer chooses a yield and terms to balance the need to attract investors and fulfill their funding requirement. I assume they put juicy coupons on the issue and let the market price the offer. My 1st buy 5 yrs ago was an initial issue priced at par and I thought all new issues were sold at par. It was a 25 yr 4% coupon university hospital bond. I wish I’d bought more.

Sounds like I should also review the call dates for my holdings. I only have four.

Do you use Fidelity? They have a pretty good bond management tool that allows you to sort by potential call date. With 4 bonds its not needed, but if you plan to continue to add it becomes very helpful when you have dozens of bonds.

 

[pb4uski]

As much as I hate myself for saying it, this time may be different.

As I recall, the 2008/2009 intervention was $700B to the banks, which was entirely repaid. Individuals and corporations got relatively little.

I think you might be right. And to be clear, the 2008/2009 intervention was entirely repaid with interest (actually dividends since the goverment owned preferred stock).

The government made $15.3 billion and that includes a $9.2 billion loss on GM.

The U.S. government essentially closed the books on TARP with a $15.3 billion profit.

Treasury sold its remaining shares Friday in Ally Financial, its last remaining major stake from the $426 billion bailout of banks and the U.S. auto industry.

The Troubled Asset Relief Program was passed in 2008, in the wake of Lehman Brothers' bankruptcy, as the nation's financial system was on the verge of collapse and economists feared another Great Depression. At the height of the bailout, Treasury owned a significant stake in all of the major U.S. banks, such as Citigroup (C) and Bank of America (BAC), two of the nation's Big Three automakers -- General Motors (GM) and Chrysler Group (FCAM) -- as well as one of its largest insurers, AIG (AIG).

But with the sale of the Ally (ALLY) stock, Treasury now only holds stakes in 35 small community banks.

Ally Financial was formerly known as GMAC, and had been GM's finance arm. While it was hurt by the plunge in car sales, its move into subprime mortgages did the most damage. Ally was bailed out as part of the auto industry bailout, since its failure would have left a significant portion of the nation's car dealers without the financing they needed to stay open.

Treasury received $1.3 billion from its final sale of Ally stock Friday, leaving it with a $2.4 billion profit on the company.

Overall, the auto bailout was the one big money loser for TARP. Even with the Ally sale, taxpayers lost about $9.2 billion. ...

 

[jazz4cash]

Do you use Fidelity? They have a pretty good bond management tool that allows you to sort by potential call date. With 4 bonds its not needed, but if you plan to continue to add it becomes very helpful when you have dozens of bonds.

Yes I'm with Fido. I'm pretty comfortable with their web tools which are impressive. I've just got to start formulating a plan B in case these get called.

 

[Retireby45ish]

I just read this entire thread. Wow. So much knowledge. When I RE I’m going to devote weeks or months to learning all about this market.

One question: what kind of extra yield do you think you get from searching for these great deals (njhowie or others?) vs buying a muni bond fund.

I guess the benefit is that if these are held to
Maturity you aren’t at the whim of a fund changing in pricing due to major market forces. Hypothetically, what if fund price didn’t move and fund was yelling a steady 1.5%.do you think you are getting 3%
Or 4%. Just really curious.

Those on this thread are masters of this craft.

 

[njhowie]

I guess the benefit is that if these are held to
Maturity you aren’t at the whim of a fund changing in pricing due to major market forces.

Bingo!

 

[pb4uski]

...I guess the benefit is that if these are held to Maturity you aren’t at the whim of a fund changing in pricing due to major market forces. ...

Bingo!

True, but to be clear, the market value of your bond portfolio would change in pricing due to changes in interest rates so the value of your portfolio woudl change... it is just that the value will eventually converge back to par value at maturity for any individual bond.

 

[njhowie]

One question: what kind of extra yield do you think you get from searching for these great deals (njhowie or others?) vs buying a muni bond fund.

I don't have hard numbers. It would be difficult to come up with something conclusive because there are many variables at work. There are a wide range of muni funds out there. Many take more risks than we'd take with our own portfolios - for example, utilizing leverage, allocating some portion of the total to lower quality garbage, etc.

What I do know is that as an individual, I am able to get many excellent deals in the muni market simply because there is opportunity offered where institutions and larger investors will not get involved - for example, digging through small lots. I will gladly take 5 or 10 bonds when that's all being offered.

At this time, there are far fewer great deals out there. I won't compromise on quality to get a tiny bit more yield. With interest rates so low, that's where we are today. However, simply because of the way the market and the dealers work, periodically some ridiculous deals still show up. If a dealer low-balls a seller and picks up some bonds, many times he will turnaround, mark it up a set amount to get his profit and offer them, as opposed to marking it up to price it appropriately for where interest rates are. For example, at the end of October, I picked up 25 pre-refunded/defeased bonds with August maturity with effective yield of 5%. It does take some time and effort if you're going to find these deals - if/when they do show up, it's not as if they are sitting there waiting hours or days for someone to take it. You have to be actively looking. That's not for most folks.

 

[njhowie]

True, but to be clear, the market value of your bond portfolio would change in pricing due to changes in interest rates so the value of your portfolio woudl change... it is just that the value will eventually converge back to par value at maturity for any individual bond.

The point is that when you purchase the municipal bond, on the date of purchase you know everything. You know what your return will be, you know the date you will get all of your money back. You are guaranteed of nothing with the fund.

 

[pb4uski]

I know that... I just wanted to make clear to Retireby45ish that the value of his bonds will fluctuate along the way even if he does hold to maturity.

And actually, what you wrote applies to not only municipal bonds, but also to any bond with a fixed maturity date.