Muni Bond (and Muni Bond Fund) Discussion

[jazz4cash]

I sure noticed the 10 year treasury bump and expected some ripple effect but I guess I don’t know how to find these deals. The bonds I already hold continue to do well and my single state fund looks ok too. I have a maturity coming up on a NYC Transit bond so I’m eyeing a sale with one coupon left if it puts an extra buck in my pocket.

 

[njhowie]

I sure noticed the 10 year treasury bump and expected some ripple effect but I guess I don’t know how to find these deals.

I have 4 saved queries in my Fidelity account (out of about 15) which I regularly use these days to extract the munis matching criteria for those I'm looking for... (1) those with maximum YTM which are taxable, (2) escrowed, (3) pre-refunded, and (4) insured. I will run those multiple times during the day sorting by descending YTM looking for any which upon further inspection "look good". In the (1) YTM bucket, though YTM may be nice, if YTW is out of line, I'll obviously pass. However, this is where I find those which are close to or past the call date, and are worth jumping in to wagering they don't call within the next month or two.

Here are a few I picked up last week:

CUSIP 839856W31 - SOUTH SAN ANTONIO TEX INDPT SCH DIST G 05.74000% 08/15/2037 O SCH BLDG BDS SER. 2010

Price paid = 100.284 + 0.1

Continuously callable right now. YTC if called in 30 days (from Jan 7) = 0.205%. YTM if never called = 5.7%. They've been callable since August. So, I accept that they may be called in 30 days, and if so, I'd take my 0.205% and have my money back. However, if they don't call in another 4 weeks and I get over that hump, every day without a call means I'm collecting 5.74% going forward. Technically, I'm already over the hump since they'd have to give 30 days call notice from today, putting it past 30 days from Jan 7.

CUSIP 45528UDL2 - INDIANAPOLIS IND LOC PUB IMPT BD BK BOND 05.00000% 06/01/2025 BK BDS SER. 2011K

Price paid = 101.626 + 0.1

This one is insured non-taxable ... in my IRA. We discussed a bit about purchasing non-taxable in IRA previously. In this case, for this bond, considering what it is offering, I consider the benefits worth eventually paying the taxes as it was better than comparable taxables at the time of purchase. It's callable June 1, and YTC would be 0.55% if called on that date. Beyond that, it's 5.0% for 4.56% YTM in 2025.

CUSIP 65949KBW1 - NORTH GRATIOT INTERCEPTOR DRAIN 06.15000% 05/01/2030 DRAIN DIST MICH DRAIN BDS SER. 2010

Price paid = 101.41 + 0.1

This one has been callable since May last year. However, it can only be called every 6 months on the interest dates (not continuously callable on 30 days notice). So, YTC if they call on May 1 is 1.35%. Beyond that, coupon is 6.15%. This one trades very infrequently. Last purchase was February 2020, and before that April 2016.

Understand, I do watch Fidelity's inventory closely during the day, and it does take a little luck in seeing the bond when it pops up, being able to quickly do cursory research, deciding whether to pay the ask or bid lower, and that someone else isn't watching and takes it before I do...or I place bid and they step in front of me and pay the ask.

Because of the environment, it is getting more difficult, as folks will just grab some of them immediately without doing any research. Numerous times, while researching for a minute or two, the bond will be taken, but I find that there is a gotcha and I wouldn't have bought - sinking fund redemptions frequently come up. I won't take any where a sinking fund redemption in a few years could cause a negative yield. Wagering on a moderately negative YTC for a couple months is one thing. However, (for example) a potential sinking fund redemption yielding negative 2% for 3 years - no way I'm touching it.

Another issue the past couple months has been the dealers not budging on their asking price. In the past, I have had relatively good luck (as you have) bidding lower than ask, and playing cat and mouse with the dealer - if I bid, they'd at least come down with their ask. Over the past few months, they've stuck to their asks. When the 10-year moved higher this week, some of them did once again begin lowering their asks when I'd submit a lower bid.

I'm crossing my fingers that the current trend continues, but am cautious, again, considering what we've seen the past few years when we'd see a bump in rates during Q1.

 

[jazz4cash]

Thanks...It’ll take me awhile to digest all that. Might get indigestion! Recall last April (?) when there were bargains all over for just a few days the 10 yr treasury had collapsed to ~0.3%. I’ll start by setting better filters for Fido search tool. I just realized I have a lot of CDs maturing this year in addition to that NYC transit issue. Plus I keep falling down YouTube rabbit holes on alternative investments so I need to focus the real world.

 

[njhowie]

Just received 30 day call notices on all of my Nassau Cnty, NY munis. Maturities 2027-2037 with coupons of 5.3% to 7.3%. They were callable as of October, so I did get a few additional months out of them.

 

[jazz4cash]

Just received 30 day call notices on all of my Nassau Cnty, NY munis. Maturities 2027-2037 with coupons of 5.3% to 7.3%. They were callable as of October, so I did get a few additional months out of them.

So how does that work..........do they cash you out at par, or....? I assume you end up a tad better than the YTW calculation when you bought?

 

[njhowie]

So how does that work..........do they cash you out at par, or....? I assume you end up a tad better than the YTW calculation when you bought?

Yes, all redeemed at 100.0. I bought all of them between 100.0 and 101.5 as they were less than a year from the October call date.

On the one hand, it's hard to watch 5% to 7% bonds snatched from you. On the other hand, receiving 5% to 7% even for a short period after the call date is wonderful relative to anything else available. I was well prepared for the possibility, and simply looked at it as a form of additional strength of the issuer and the bonds. Whereas we'd generally look at 5% to 7% muni bonds as being somewhat risky, in the current environment, in my view, they get an almost automatic boost in quality because refinancing terms are so loose at this time. I have many bonds in a similar situation. The Alaska Airports bonds Graybeard and I have is another. For as long as it lasts, it's great.

I get weekly emails from bondlink.com of new muni bond issues coming to market. Bonds coming to market are being priced to yield well under 2% for up to 20 years. Further, most new issues are being sold with high coupons of say 3% to 5% but at a price well above 100.0. So for instance, they sell a 5% 10 year bond for 128.74 to yield 1.79%. Again, this is another sign of strength of the market, that investors are willing to pay up front to lock in the yield.

Anyone who wants/needs to refinance in the muni space is having money thrown at them as there continues to be huge demand. Rates go up, and I still see the dealers refusing to budge on prices they are asking in the secondary market. I was able to pick up some longer term zero coupon bonds on Monday below the asking price - dealer was offering at 14.38 and he gave me 14. On 50 bonds that's a $190 discount. I felt good about that because dealer paid 13.934 - made almost nothing giving them to me. jazz - here, in the case of zero coupons, if they call, they will redeem below 100.0 on a pre-determined price schedule (price increases every year). On this one, if they call on the 8/14/2024 call date, the price they'll pay is 14.764. After that, it goes up about 4% every 6 months.

3464243E2 - Forney, TX - Insured/GO callable 8/15/2024 for 1.322% YTC, 6.995% YTM.

https://emma.msrb.org/Security/Details/?id=3464243E2

 

[Mr._Graybeard]

I'm going to have a lot of cash by the end of the year with all the bonds I have maturing/being called in 2021. Most of them I bought on the secondary market in 2015/16, so it's been a decent run.

The current market is terrible, of course. I like to buy bonds from my home state, but most of them are selling at 110% premiums or more. I did pick up a DFW airport bond this month with a 5% coupon and an 11/22 call date -- factoring in the premium I paid it would yield about 1% if called on time. I'm hoping DFW follows Alaska's lead and puts off that call.

I've also got a 5.5% bond from Gallaudet University that has a call date of April 1. I'd sure like to have that one stick around a bit longer as well. My only zero, from the city of Indianapolis, matured Feb. 1. Good riddance.

 

[jazz4cash]

I'm going to have a lot of cash by the end of the year with all the bonds I have maturing/being called in 2021. Most of them I bought on the secondary market in 2015/16, so it's been a decent run.

The current market is terrible, of course. I like to buy bonds from my home state, but most of them are selling at 110% premiums or more. I did pick up a DFW airport bond this month with a 5% coupon and an 11/22 call date -- factoring in the premium I paid it would yield about 1% if called on time. I'm hoping DFW follows Alaska's lead and puts off that call.

I've also got a 5.5% bond from Gallaudet University that has a call date of April 1. I'd sure like to have that one stick around a bit longer as well. My only zero, from the city of Indianapolis, matured Feb. 1. Good riddance.

Ownership of some issues comes with a sense of civic participation....doing well by doing good, so to speak. I've been eyeing some zeroes but don't quite feel comfortable (yet) so these threads are great for teaching me where to look for enlightenment.

 

[Mr._Graybeard]

Ownership of some issues comes with a sense of civic participation....doing well by doing good, so to speak. I've been eyeing some zeroes but don't quite feel comfortable (yet) so these threads are great for teaching me where to look for enlightenment.

Yes, Gallaudet is an attractive debtor to me for that reason. Plus, it's a prominent university that seems likely to continue at a time when some lesser ones may go bankrupt.

I would say that zeroes are appropriate if you don't need immediate cash flow. I was considering a zero recently from the Wisconsin Center District, which operates the convention center, an auditorium and two basketball/hockey arenas (Bucks/Admirals) in downtown Milwaukee. The bond was good for up to a percentage point more interest to call than other munis of similar term.

Part of the reason they were selling off is because the Wisconsin Center was supposed to host the 2020 Democratic Convention, which was reduced to virtual form due to the pandemic ... but the center did get a sizable percentage of the rent that the Democrats had arranged to pay.

Overall, zeroes tend to be more volatile price-wise than bonds paying a coupon. Not a problem if you hold them to redemption, and you may find some bargains in a sell-off.

 

[jazz4cash]

Do zeroes come under the deminimus rules? Lack of knowledge is holding me back here

 

[Mr._Graybeard]

Do zeroes come under the deminimus rules? Lack of knowledge is holding me back her.

I can't answer that. Maybe NJHowie can.

To be honest, I don't pay much attention to tax implications of my muni holdings since their interest is tax exempt -- I just plug the numbers from my 1099 into the tax software.

 

[njhowie]

Here's a tutorial:
https://www.wsc.com/portal/hps/oid_tutorial.html

I personally don't deal with it and am certainly not a tax professional. I import all data from Fidelity to TurboTax. If it comes into play, TurboTax would take care of it as Fidelity does report OID. The vast majority of my bonds are in my IRA, so no issues there.

The tutorial does indicate that de minimis does come into play with zeroes.

 

[njhowie]

Out of curiosity I just had a look at some of my zeroes in my taxable account.

What's interesting is that Fidelity has the cost basis indicated above my purchase price on all of them.

I have just one which is a taxable zero in my taxable account, so I focused my investigation on that one.

I purchased that zero in March 2018. I paid 77.957 for the bonds with maturity in December 2024. In that March 2018 monthly statement, Fidelity showed the cost basis to be 80.134. Fast forward to March 2019, the monthly statement indicates cost basis to be 84.8884. March 2020, cost basis is 93.905. Jan 2021 cost basis is now 96.524.

As far as tax implications and what TurboTax did with the data Fidelity provided, I'll need to go back and check.

 

[Mr._Graybeard]

Out of curiosity I just had a look at some of my zeroes in my taxable account.

What's interesting is that Fidelity has the cost basis indicated above my purchase price on all of them.

I have just one which is a taxable zero in my taxable account, so I focused my investigation on that one.

I purchased that zero in March 2018. I paid 77.957 for the bonds with maturity in December 2024. In that March 2018 monthly statement, Fidelity showed the cost basis to be 80.134. Fast forward to March 2019, the monthly statement indicates cost basis to be 84.8884. March 2020, cost basis is 93.905. Jan 2021 cost basis is now 96.524.

As far as tax implications and what TurboTax did with the data Fidelity provided, I'll need to go back and check.

Yes, Schwab has definitely increased the basis on my Indianapolis zero over the five years I've owned it. It appears that Schwab reported the amount equal to my basis appreciation as tax-exempt interest.

Here's an explanation of the tax treatment of zero-coupon bonds: https://www.thestreet.com/markets/rates-and-bonds/do-zero-coupon-muni-bonds-ever-generate-tax-bills-910564

 

[njhowie]

It appears that Schwab reported the amount equal to my basis appreciation as tax-exempt interest.

Right, so that's where my curiosity is with regard to how the basis appreciation was handled by TurboTax on my taxable zero - what tax rate was applied?

 

[ownyourfuture]

It's only a 1.88% move down, but a 1 month chart of my Minnesota muni bond fund sure looks ugly

 

[jazz4cash]

My single state muni is comparable. That chart is not so bad. I just focus on the distribution yield which is pretty sweet.

 

[target2019]

Expense ratios in muni bond funds make a difference too. YTD performance of Vanguard NJ long term is 1.25%. USAA Tax Exempt Long-Term Fund is 1.04%. This is not great in either case, but we're ok.

 

[Mr._Graybeard]

Some double-tax-exempt funds hold bonds from the US Virgin Islands, Puerto Rico and Guam, since states cannot tax their proceeds. Their yields tend to be high because of credit risk, which also adds to their volatility.

 

[jazz4cash]

Kinda jealous of the folks with multiple single state muni fund options like long, short, intermediate and MM. Vanguard did close a couple state MM funds due to lack of supply. That issue could affect other segments also. Pretty much all the funds for my state are intermediate and the difference in performance is nearly zip.

 

[njhowie]

My only zero, from the city of Indianapolis, matured Feb. 1. Good riddance.

The Indianapolis muni I mentioned in the Jan 11 post above just gave notice they are calling on June 1. Oh well.

 

[Mr._Graybeard]

Kinda jealous of the folks with multiple single state muni fund options like long, short, intermediate and MM. Vanguard did close a couple state MM funds due to lack of supply. That issue could affect other segments also. Pretty much all the funds for my state are intermediate and the difference in performance is nearly zip.

My state (Wisconsin) doesn't give a lot of tax exemptions on in-state munis. So there's only one state-exempt muni fund that I know of, and that one has a lot of exposure to Guam.

When I was young and (more) foolish I parked some fairly short-term money in a state tax-exempt fund that Milwaukee-based Heartland ran. To my surprise, the NAV bounced wildly when interest rates started moving. After about six months it returned to about the break-even point, and I got out fast. I did some belated due diligence after that and found that the fund held a lot of Puerto Rico debt. This was long before the island's finances really crashed, but they still were volatile holdings with plenty of credit risk.

 

[Mr._Graybeard]

The Indianapolis muni I mentioned in the Jan 11 post above just gave notice they are calling on June 1. Oh well.

My Gallaudet University bond is being called too. At 5.5% coupon they weren't going to let that one ride.

I'm also saying goodbye to a taxable Goldman Sachs bond that was good to me -- 4.7% coupon, payable monthly. I bought it at near face value about five years ago. That one is maturing in the middle of the month.

I just got off the phone with an investment rap from my credit union. A CD is coming due, and a renewal would have an 0.5% APY. He's was pitching a high-yield fund with a 4.25% front-end load -- so it's high-yield for him more than me.

 

[njhowie]

I just got off the phone with an investment rap from my credit union. A CD is coming due, and a renewal would have an 0.5% APY. He's was pitching a high-yield fund with a 4.25% front-end load -- so it's high-yield for him more than me.

We had an 18-month 3.0% CD at a CU mature today. They were renewing it at 0.3% for another 18-months. We cashed it out.

 

[Golden sunsets]

We had a NASA 3.25% mature today too. We added it to our GTE CD that yields 2.98%.