jazz4cash
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The last bond I purchased is showing a "last price" of 117.xx on my Fidelity account summary page. How realistic it that? I paid 109.xx a week or so ago.
Bond Dividend Allocation
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njhowie
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As previously mentioned, the last price shown in your portfolio list for a bond/CD/treasury is going to be the third party price - not the price of the last buy or sell (which you could easily verify). The portfolio summary is a single list of all of your stocks, bonds, and other products, so there is only going to be one column header for all of them.
As a muni bond investor, understanding how the market works, and generally being a buy and hold to maturity investor, you really should not care what the third party price is. The day you purchased the bond, you locked in the interest and yield to maturity. When the maturity date comes, you're going to collect 100.0, no matter what happens between now and then.
As far as how realistic it is, this morning, go in and select the bond and click to sell it. Since there likely aren't currently any offers of more of them for sale, it will prompt you to Request a Bid. Follow it through - it will post the bonds to the platform for dealers to bid on. It takes an hour for the process to complete and then you'll get an alert with the best price offered, where you can then decide if you want to sell them or not. This will give you the realistic price you could sell for. You could probably expect the bid to come back lower than what you paid. With your bonds, since they are extremely illiquid, it's possible that you do not get any bids back. However, you never know, one might come back close to the 117 price (or even higher) and you could sell for a quick profit. Any dealer offering you a bid is simply making a decision if he can quickly turn around and sell it at a higher price to someone else.
When the muni market gets tight with bonds selling above the third party price, I regularly request bids on lots of my bonds. I have sold when the price offered was a fair amount above the third party price and where I know they are overvalued. In a few circumstances, just a few weeks later I've repurchased the same bonds at a lower more realistic price. Yes, timing the market - doesn't bother me. However, it's not a matter of some gut feel or a routine of jumping in and out. It's simply mathematical logic. When I get the bid back from Fidelity, I simply go plug it in to their price-yield calculator, the same as I do when first purchasing, to determine yield to maturity and yield to call after commissions. If at any point the yield to maturity or yield to call fall below what I am looking for in my bonds, I will readily sell - as it means that the yield is no longer sufficient for the risk. I regularly did this when CD rates were up - if I got bids that would make the yield on the bond close to or less than the yield on a comparable CD, I'd sell the bond and be thankful - I locked in a profit and could then switch in to a comparable CD which has absolutely no risk.
Bottom line - the same as with anything you own - whether it's stock in your Fidelity account, your house, your car, or anything else - the "last price" should only be of interest/concern if you are looking to sell.
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jazz4cash
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Thanks for the detailed response. It confirms my expectation wrt the 3rd party price. The part in bold is confusing to me. The yield to call/maturity that you are calculating based on the offer from dealers responding through Fido does not seem relevant. Your yield to call/maturity is based on the price you paid not the 3rd party offer price. I could see/anticipate some consideration of locking in a profit if the calculated yield by selling falls between the yield to call and yield to maturity if I anticipate likelihood of a call. That is something for me to research and prepare for.
The other bonds I purchased recently (NYC Transit) have gone in the other direction and are trading a bit below par. I wish I was buying at the current price, but I do not want to pile anymore into this issuer at this point. I am very comfortable since I plan to hold to maturity which is 18 months on one issue and 60 months for the other. They pay a divvy this month which feels like instant gratification since I only purchased 2 weeks ago or so.
jazz4cash
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I listened to some analysis on Bloomberg radio today on the topic of municipal finances in light of all the revenue lost during this pandemic. It basically waived off the severe doom and gloom scenarios (e.g. defaults) and concluded that worst case would be some downgrades and an extended recovery period. I think a lot of this is based on expectations of continuing accommodations by the Fed. I'll try to dig the audio out of their website to assess more critically.
When I look at the pricing on munis that I would consider buying, they seem to be holding up pretty well. Some good buys are out there, but the fire sale bargains from a few weeks ago are gone.
When I look at the pricing on munis that I would consider buying, they seem to be holding up pretty well. Some good buys are out there, but the fire sale bargains from a few weeks ago are gone.
COcheesehead
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The financial well being of a bond is unique to each bond. I always read the ME's, the material events. EMMA is your friend for those. They will tell you everything you want to know about how the virus is or is not affecting their finances.
Anything related to crowds: transit, convention centers, sports stadiums, etc, I am staying away from though the yields look attractive.
Anything related to crowds: transit, convention centers, sports stadiums, etc, I am staying away from though the yields look attractive.
njhowie
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Yes, "my" yield to call/maturity is set on the day I purchase the bond. However, let's say that interest rates go down, and the "value" of your bond goes up. Is there not a point where it is better to sell the bond and pocket the capital gain now rather than continuing to hold the bond to maturity? The price-yield calculator is your friend for this. You can calculate the yield to call/maturity at any point in time based on the coupon, call/maturity date, and the current price.
Let me give you the obvious scenario - the price of the bond (amount offered by the dealer when requesting a bid) makes the yield to maturity 0%...you have a 5% bond with 2 years to maturity where you've been offered 110 for it today. Do you take the 110 or hold it for 2 years to collect the 10 and redeem for 100? Of course you take the 110 today.
The rest of the details I went through is simply about using the price-yield calculator to come up with the yield to call/maturity based on what the dealer is offering you and the decision making process.
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jazz4cash
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Yeah, I get it. I never even considered the absolute limited upside of holding to maturity. It is a known known. OTOH the potential judgement call on if an issue is likely to be called is still an area for me to study. My gut is that the inertia to redeem at maturity is a tall order to overcome, but we are in unusual times.
njhowie
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Anticipating a call is not something which can really be mastered. I've seen issuers who were relatively weak call an issue, and then I've seen strong ones not call when they had an obvious benefit to doing so. Many times I will purchase a bond that is within 3 to 6 months of the call date, offering a relatively low yield to call - maybe in the same ballpark that the equivalent CD is available for. Generally they will trade near 100.0 as folks simply expect they will be called. However, should they not call, the big upside is that you can have a nice 6% or 7% bond going forward until they do call.
I purchased a 6.2% AAA 2039 NYC muni for my mother a while back at 100.6 with only 3 months until the call date. Clearly, trading at 100.6 the expectation was that they'd be called. That was April last year when I purchased. So, unexpectedly, they didn't call and now we still have that AAA 6.2% bond. They can call whenever they like, or not at all - 6.2% is ridiculous at this time for as long as it lasts.
https://emma.msrb.org/Security/Details/?id=64971MZH8
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njhowie
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Here's an interesting one I have that just passed the call date on 5/1:
https://emma.msrb.org/Security/Details/A4AC4E8E3B32BF503536E0089580FC279
I own 5 of the bonds. That last trade shown on 8/15/19 was when I bought. The interesting part of it - look at the blue box on the left showing the Coupon and Maturity Date, look a couple lines down and notice the Principal Amount at Issuance - $25,000!
Here is the entire bond issue:
https://emma.msrb.org/IssueView/Details/0A896BDFEC7860217E60F4FEEC3785D2
So, they've previously pre-refunded and redeemed everything except a total of $75,000 across the four maturities. I have no idea why they would do something like that...they refunded/called about $35 million worth, why leave $75,000 hanging? They can obviously afford to just pay it off - they're AA rated. So like I mentioned on the prior reply - this was one I purchased within sight of the call date (which would have YTC of 2.4% for 8.5 months), but now I'm getting 6.65% gravy going forward until they do call, or until it matures in 2040.
I was well aware of the situation when I purchased, so this isn't a surprise or anything, I just found it very interesting.
https://emma.msrb.org/Security/Details/A4AC4E8E3B32BF503536E0089580FC279
I own 5 of the bonds. That last trade shown on 8/15/19 was when I bought. The interesting part of it - look at the blue box on the left showing the Coupon and Maturity Date, look a couple lines down and notice the Principal Amount at Issuance - $25,000!
Here is the entire bond issue:
https://emma.msrb.org/IssueView/Details/0A896BDFEC7860217E60F4FEEC3785D2
So, they've previously pre-refunded and redeemed everything except a total of $75,000 across the four maturities. I have no idea why they would do something like that...they refunded/called about $35 million worth, why leave $75,000 hanging? They can obviously afford to just pay it off - they're AA rated. So like I mentioned on the prior reply - this was one I purchased within sight of the call date (which would have YTC of 2.4% for 8.5 months), but now I'm getting 6.65% gravy going forward until they do call, or until it matures in 2040.
I was well aware of the situation when I purchased, so this isn't a surprise or anything, I just found it very interesting.
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jazz4cash
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The trade activity is not coming up right now for some reason. I see a Build America Bond notation....is that an insured bond?
njhowie
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Build America Bonds fall under the program which the government put into place during 2009 crisis. It means government subsidizes a portion of the interest payments through tax credits which go to the municipality. Most all of them contain a clause that should Treasury reduce or eliminate the subsidy that they have the right to immediately call the entire issue and pay it off at par at that time. Most all of the Build America Bonds contained general call provisions beginning 10 years after issuance - which began over the past two years. There are still a fair number of Build America Bonds out there, and in general, because of the comparatively high interest rates at the time, most all are being called immediately when they can be.
Some Build America Bonds do come with insurance, however, most do not.
COcheesehead
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One thing I learned from you is to dig a little deeper on bonds.
Looking for those bits of added value here and there. You are a master
njhowie
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Luxury Dorm Financed with Muni Bonds Falls Into Bankruptcy - less than 16 months after issuance:
https://www.bloomberg.com/news/arti...inanced-with-muni-bonds-falls-into-bankruptcy
It's the same situation as the University of Oklahoma housing project previously mentioned.
This is an example of a non-muni use of muni bonds. Note that these bonds were unrated.
https://www.bloomberg.com/news/arti...inanced-with-muni-bonds-falls-into-bankruptcy
It's the same situation as the University of Oklahoma housing project previously mentioned.
This is an example of a non-muni use of muni bonds. Note that these bonds were unrated.
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jazz4cash
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Not to go OT, but I a have been stunned that college dorm housing has gone so far upscale. OTOH in some markets a luxury space could be easier to convert to offer to the general public. I've been surprised at the range of projects that qualify as a muni bond. Thanks for the encouragement to dig deeper, as COcheese mentioned. This particular deal should be interesting to watch. The whole universe of college finances may be getting turned upside down.
njhowie
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Here's another issue I purchased close to the call. This was a unique one. I purchased in November, about five weeks prior to the January 1 call date. That passed and they provided notice of the call maybe early/mid-February that it would happen mid-March. And then...they canceled the call! First time I've seen that. So, at the time of purchase, assuming the Jan 1 call, my effective yield was about 2.15% for five weeks, which was decent yield relative to comparable one month CDs. Since Jan 1, I'm getting 5.7%.
After they canceled the call, of course I was curious as to what happened. I contacted the issuer (a water utility system). They referred me to their investment advisor/underwriter, who said it was simply a matter of market conditions, and that it was not good timing for issuing the bonds being used to refinance. They would still do it, but just at a later date. Fine by me, give me the higher yield in the interim. My guess is that with interest rates continuing to decline, they can probably now issue the refinancing bonds at even lower yield than planned.
Now, clearly other folks who didn't contact the issuer or investment advisor jumped to conclusions, assuming something bad was in the works, and sold their bonds - below par. So, I was able to pick up another one of the maturities with 6.125% coupon for 99.75 (which the seller unloaded at 97.3).
https://emma.msrb.org/Security/Details/?id=840120AD1
https://emma.msrb.org/Security/Details/?id=840120AF6
https://emma.msrb.org/ER1319789-ES1061764-ER1435213.pdf
These past few weeks I've continued picking up quality high-yield issues which are ripe to be called within the coming 12 months. There were a couple of AAA issues I had to call in for Fidelity to do manually. These were actually past the call date and continuously callable, meaning they can call immediately with 30 days notice, not even waiting until the next coupon date. However, considering they hadn't been called yet, and with the virus and volatility in the markets, I figured they likely would not be initiating a call at this time. Since they trade slightly above 100.0, and after the $1/bond commission is added in, the effective yield (if called in 30 days, which Fidelity's system assumes will happen) is negative, Fidelity does not allow purchasing online. On the day I purchased last month (last trade at the link below), if it were called in 30 days, my effective yield would have been minus 1.35% (a loss of about $5.75). Today, worst case, I'm now in the green - if they call in 30 days, my effective yield is 2.05%. Beyond that, 6.038% - all gravy.
https://emma.msrb.org/Security/Details/?id=849476ME3
After they canceled the call, of course I was curious as to what happened. I contacted the issuer (a water utility system). They referred me to their investment advisor/underwriter, who said it was simply a matter of market conditions, and that it was not good timing for issuing the bonds being used to refinance. They would still do it, but just at a later date. Fine by me, give me the higher yield in the interim. My guess is that with interest rates continuing to decline, they can probably now issue the refinancing bonds at even lower yield than planned.
Now, clearly other folks who didn't contact the issuer or investment advisor jumped to conclusions, assuming something bad was in the works, and sold their bonds - below par. So, I was able to pick up another one of the maturities with 6.125% coupon for 99.75 (which the seller unloaded at 97.3).
https://emma.msrb.org/Security/Details/?id=840120AD1
https://emma.msrb.org/Security/Details/?id=840120AF6
https://emma.msrb.org/ER1319789-ES1061764-ER1435213.pdf
These past few weeks I've continued picking up quality high-yield issues which are ripe to be called within the coming 12 months. There were a couple of AAA issues I had to call in for Fidelity to do manually. These were actually past the call date and continuously callable, meaning they can call immediately with 30 days notice, not even waiting until the next coupon date. However, considering they hadn't been called yet, and with the virus and volatility in the markets, I figured they likely would not be initiating a call at this time. Since they trade slightly above 100.0, and after the $1/bond commission is added in, the effective yield (if called in 30 days, which Fidelity's system assumes will happen) is negative, Fidelity does not allow purchasing online. On the day I purchased last month (last trade at the link below), if it were called in 30 days, my effective yield would have been minus 1.35% (a loss of about $5.75). Today, worst case, I'm now in the green - if they call in 30 days, my effective yield is 2.05%. Beyond that, 6.038% - all gravy.
https://emma.msrb.org/Security/Details/?id=849476ME3
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jazz4cash
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Thanks for all the great detail. It’s a lot to digest! I had seen some Spring, TX tax free bonds show up on one of my searches but they were not as attractive as the taxable version. You made that point a few posts back. You are a master of this asset. I’m really just looking now, learning busy and preparing for a purchase in Jan. Too busy jumping hoops to move credit union IRA funds.
Did I see you or maybe Brewer mention using tax free munis in IRAs if the yields were high enough? Don’t think I’ll be doing that.
Did I see you or maybe Brewer mention using tax free munis in IRAs if the yields were high enough? Don’t think I’ll be doing that.
njhowie
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You have a very good memory. I had mentioned it, and brewer also replied just after that he had done the same.
Here is the one in particular I had bought. In this case, it made complete sense, and if I only had spare cash in a taxable account I would have jumped at it from there. However, when you review these points, it is clear that even for the tax deferred account, even though I won't get the tax free benefit from it, it is a much better credit than all of the taxable issues available at that moment:
https://emma.msrb.org/Security/Details/?id=082383MQ0
1. Pre-refunded - this means there is absolutely zero risk
https://emma.msrb.org/ES1357320-ES1057749-ES1463323.pdf - jump to last couple pages where the pre-refunded maturities are indicated
2. Redemption in 3.5 years with effective yield of 3.24%
3. Don't even look at the details of my purchase on 3/23 - just look at that summary tab and the price on 3/10 right before and 4/1 right after...and the price just last week, where the buyer is only getting 0.75%. Seeing that, I'm going to request a bid on it right now and see what comes back. If I can get 114 for it, I'll sell.
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jazz4cash
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Ok thanks. That’s a lot to chew on, but chew I will.
njhowie
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I can help you reach the conclusion very quickly.
If I offered you a 3.24% 3.5 year tax free Treasury or CD for your IRA today would you take it? Just assume there was such an animal, would you care if the underlying security was tax free? Same thing here - you'd jump at it, the yield being produced for zero risk is awesome at this time.
When the bond is pre-refunded, it is as good as a treasury, because the escrow account for it is filled with treasury securities. That's a key point - those treasuries in the escrow - they're at maybe 0.5% up to 1.5% or 2.0%, and yet, the bond it's pre-refunding yields 3.24%. Makes no sense, but this is proof positive that the market is inefficient.
If I offered you a 3.24% 3.5 year tax free Treasury or CD for your IRA today would you take it? Just assume there was such an animal, would you care if the underlying security was tax free? Same thing here - you'd jump at it, the yield being produced for zero risk is awesome at this time.
When the bond is pre-refunded, it is as good as a treasury, because the escrow account for it is filled with treasury securities. That's a key point - those treasuries in the escrow - they're at maybe 0.5% up to 1.5% or 2.0%, and yet, the bond it's pre-refunding yields 3.24%. Makes no sense, but this is proof positive that the market is inefficient.
njhowie
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The best bid came back at 112.4, which is low compared to where the recent sales were taking place. At that price, it would produce a yield to redemption of 1.345%, for 3.5 years, which isn't terrible. So I'll keep holding for now, maybe request another bid for it next week and see if I can get it above 113. I would want to get the yield to the redemption date down below 1.0% to sell.
njhowie
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I just received notice that they are going to attempt to do this again, new call date July 15. So I got an extra 4 months at ~6% ... not bad at all.
https://emma.msrb.org/RE1352121-RE1051353-RE1460074.pdf
jazz4cash
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How do you receive notice of the proposed redemption? I have steered clear of IL issues until I get more comfortable with analyzing the specific issue. I see this one says it is GO in one place and Revenue in another.
njhowie
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If it's in your portfolio, Fidelity will send you an alert any time there is a new disclosure posted on EMMA.
What is the CUSIP for the IL issue you're looking at?
The easy way to tell if it is GO - open up the official statement on EMMA. If GO, there are a couple of tell-tale signs.
1. Right on the title or description of the bonds it might say they are General Obligation. For example, here are a few I hold:
"$20,325,000 General Obligation Corporate Purpose Bonds,Series 2011A"
"24,795,000 General Obligation Corporate Purpose Bonds,Taxable Series 2011B"
"MC KEESPORT PA GO NTS 2005 B (PA)"
"BEAUMONT TEX INDPT SCH DIST G O SCH BLDG BDS 2010B (TX)"
2. Go to the section on Security For the Bonds, and there should be statements to the effect of "...full faith and credit have been irrevocably pledged" , "...has levied ad valorem taxes on all property in the Village, without limitation as to rate or amount, for the purpose of paying principal of and interest on the Bonds when due".
#2 is most important. Whether the bonds are titled as General Obligation or Revenue is irrelevant. You are looking for full faith and credit being pledged along with the promise to levy ad valorem taxes as necessary. The issuer generally indicates "without limitation", however, I do have a couple where they do limit, and they are still General Obligation.
"The general obligation bonds are direct obligations and pledge the full faith and credit of the District."
"The Refunding Bonds are direct obligations of the District, payable from an ad valorem tax levied, within the limits prescribed by law, on all taxable property located within the District. The Schoolhouse Bonds are direct obligations of the District, payable from the proceeds of a continuing ad valorem tax levied without limit as to rate or amount against all property within the District. "
What is the CUSIP for the IL issue you're looking at?
The easy way to tell if it is GO - open up the official statement on EMMA. If GO, there are a couple of tell-tale signs.
1. Right on the title or description of the bonds it might say they are General Obligation. For example, here are a few I hold:
"$20,325,000 General Obligation Corporate Purpose Bonds,Series 2011A"
"24,795,000 General Obligation Corporate Purpose Bonds,Taxable Series 2011B"
"MC KEESPORT PA GO NTS 2005 B (PA)"
"BEAUMONT TEX INDPT SCH DIST G O SCH BLDG BDS 2010B (TX)"
2. Go to the section on Security For the Bonds, and there should be statements to the effect of "...full faith and credit have been irrevocably pledged" , "...has levied ad valorem taxes on all property in the Village, without limitation as to rate or amount, for the purpose of paying principal of and interest on the Bonds when due".
#2 is most important. Whether the bonds are titled as General Obligation or Revenue is irrelevant. You are looking for full faith and credit being pledged along with the promise to levy ad valorem taxes as necessary. The issuer generally indicates "without limitation", however, I do have a couple where they do limit, and they are still General Obligation.
"The general obligation bonds are direct obligations and pledge the full faith and credit of the District."
"The Refunding Bonds are direct obligations of the District, payable from an ad valorem tax levied, within the limits prescribed by law, on all taxable property located within the District. The Schoolhouse Bonds are direct obligations of the District, payable from the proceeds of a continuing ad valorem tax levied without limit as to rate or amount against all property within the District. "
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njhowie
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Not all IL issues are suspect - though there is a population of investors who will blindly say "I do not invest in munis from IL, NJ, CA, CT, ...". For those folks, it is a pity that they do not even attempt to analyze beyond the state issuing. However, that makes opportunity for those who do look below the surface.
Then there are the pre-refunded issues - which I have owned from all of these states listed above. If I see that an issue is pre-refunded, my only analysis is simply whether there may be sinking fund redemptions which could "call" the bonds, before the call date. The bonds could be deep in to the junk bond ratings, but if I see that it is irrevocably pre-refunded, I really don't care.
In many of these cases, the issuer has a credit profile significantly better than the state has. If you look at the latest audited financials and see that the issuer is swimming in cash and only has a relatively small amount of debt, who really cares about the finances of the state?
Yesterday, for example, I purchased some bonds of Wellesley College in CT. Folks are running around pulling their hair out at this time staying away from university bonds because of the virus, and then CT to top it off - njhowie must be nuts!
However, look at the finances - Wellesley is better off than most municipalities.
https://emma.msrb.org/EP627724-EP491077-EP891850.pdf
"The Issuer, the Institution and the Trustee shall execute the Agreement, which provides that to the extent permitted by law, it is a general obligation of the Institution and that the full faith and credit of the Institution is pledged to its performance."
https://emma.msrb.org/ER1266766-ER989103-ER1391453.pdf
See balance sheet on page 3:
This school is sitting on over $2B in its endowment, has $90 million in the checking account, and a total of $320 million in bonds outstanding. Who wouldn't kill for that kind of position?
Bottom line - regardless of the state where the issuer is located, you need to go to EMMA, browse through the filings, and make an evaluation of the financial strength of the issuer.
I also have multiple IL bonds where the issuers are very strong and not anywhere near the problems which the state has.
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njhowie
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Sorry, my mistake - it's not CT, but MA.
Still, the points hold - regardless of state or other superficial issues, we need to dig beneath the surface and look closer.
