Muni Bond (and Muni Bond Fund) Discussion

[Mr._Graybeard]

Quote:

Originally Posted by njhowie I haven't looked closely at that JPM - I think this is the first month it's ever been offered (CD based on that index). 140% is a very good participation rate - most important is how the index performs. Generally they are 100%. I have seen one or two where it was below 100% using straight S&P 500 index for 3 to 5 years. My view is not to be overly concerned with the participation rate if you are good with the index and its performance. If you're happy with the performance, then above 100% is going to make you very happy. I haven't looked closely at that particular JPM issue as I had my sights set on the other two which were at 200% this month (issued on Thursday last week). I'm confident there will be more of all of them in two weeks when the September batch is available. Also, just my approach - I think the way to utilize these is to just nibble on them...laddering in essence, never overload on any one issue/index. Because the ultimate valuation is going to be determined near the maturity date, you don't want to get lower return just because the market/index may have dipped or had a correction close to it. Further, if you just nibble on a bunch of them, your risk is spread out. But again, there's no downside risk, so you can choose those with a very aggressive index and volatility and sleep well knowing you won't lose. Dipping is the right approach in my view, even when you become very comfortable with them - two years later, and I still only dip when I buy.

The index seems to be a hybrid of stocks and bonds with a 3% target appreciation rate, so quite conservative. I like keeping the term relatively short, so 5 years is about as far out as I'd care to go.

And yes, I don't expect to dive headlong into these. I've generally taken out CDs at $100K to take advantage of jumbo rates, but those are a thing of the past. I'm thinking about $25K max per CD as I get familiar with the product.

[jazz4cash]

Thanks for multiple mentions of this index linked CD product. I will probable take a tiny position and continue to digest the pros and cons. I do hate proprietary indices.

[njhowie]

Quote:

Originally Posted by jazz4cash Thanks for multiple mentions of this index linked CD product. I will probable take a tiny position and continue to digest the pros and cons. I do hate proprietary indices.

I don't disagree with you.

My thinking from the very beginning, and even more so today is that since interest rates are so low and we effectively get 0% on bonds and CDs, if there's even the slightest chance that any of these proprietary indexes do perform it's worth it. I really don't care how insane the index may be. You have absolutely nothing to lose with the worst case being return of principal, and you have the FDIC backing on that principal amount, just like a traditional CD.

[njhowie]

Quote:

Originally Posted by Mr._Graybeard I'm thinking about dipping into these structured CDs ... JPM has a 5-year with a 140% participation rate at the moment. Howie, I assume you've been watching these offerings more closely than I have. Should I wait for a higher participation rate to come along? Today, 140% is as good as it gets. Is a higher rate (like 200%) pretty unusual? BTW, the JPM prospectus is only 11 pages, with most of the content being boilerplate disclaimers -- not a challenge at all to digest.

So did you get it today?

[Mr._Graybeard]

Quote:

Originally Posted by njhowie So did you get it today?

Yep, we'll see how it turns out in five years. At worst I'll get my money back.

[jazz4cash]

I'm in also for 15K in my IRA. It's a pig in a poke, but I do trust JPM (sorta). It'll fund some fun money for a year.

[Mr._Graybeard]

The structured CD seems a lot like a fixed annuity with the plus of FDIC protection, but the minus being you don't know the ultimate return. I've got $100K in a 3-year fixed annuity at the moment, wouldn't mind having a similar position in these structured CDs.

[jazz4cash]

So, we’ve taken this easy way OT, but I see your point except how do you compare a 3yr annuity to a 5 yr S-CD? A 3 yr MYGA rated B++ is paying 2.4. My 5 yr from Dec pays 3.05. I expect the S-CD to beat that but worst case is return of principal, right? I suppose there are ways it could lose but I suspect it’d be a function of much bigger issues in the markets.

[njhowie]

I don't see how it loses under any circumstance - unless you try to sell before maturity, or FDIC renegs on its responsibilities. Issuing bank has the ability to call before maturity for those where they are callable, but at that time, same terms apply - either the index*participation rate or return of principal. I don't believe the JPMs were callable - I know that my Goldmans are.

[njhowie]

I picked up a CA municipal electric muni this morning. I had been putting bids in on it for the past week and dealer was not budging. Finally this morning the ask was about 1/2 point lower than where it was a week ago when I started bidding, so I took it. August 2025 maturity for 5.01%, callable August 2022 for 1.02%. Coupon on it is 6.375%, so likely to be called, but who knows - you all know I have a fair number that are high coupon and past the call date.

[Mr._Graybeard]

Longer-term interest rates seem to be edging up ever so slightly if the secondary muni market is any measure. After months of seeing YTW rates on calls in this decade topping out at 2%, I bought a Harris County water/sewer MUD bond that will pay 2.2% with a call five years out. The coupon is a little lower than I'd like at 2.65%, but it's double-barrel and insured, so I'll take the risk that it won't be redeemed immediately upon the call date.

I guess I'm working the other end of the market from Howie. I usually assume that a bond will be called before maturity ... if long-term rates take a solid bump upward, of course, I could be holding some low-yield paper here.

[njhowie]

Quote:

Originally Posted by Mr._Graybeard I guess I'm working the other end of the market from Howie. I usually assume that a bond will be called before maturity ... if long-term rates take a solid bump upward, of course, I could be holding some low-yield paper here.

That's a good/valid approach. I keep an open mind, that they may not be called for one reason or another - and in the best case, that reason is that rates have risen...so there's less impetus to call and we can also get some nice yielding longer term issues.

As far as when the call is - I prefer that it's very near term, ideally a year or less, and simply that the yield to call beats out CD yields for that time frame. If I can get that YTC above the equivalent term CD yield, and there's a really good YTM, I'm more than happy purchasing accepting the call risk. I know I will do better than CD yields, and worst case it is called, it will happen early on so I can redeploy into something else.

[aja8888]

Quote:

Originally Posted by Mr._Graybeard Longer-term interest rates seem to be edging up ever so slightly if the secondary muni market is any measure. After months of seeing YTW rates on calls in this decade topping out at 2%, I bought a Harris County water/sewer MUD bond that will pay 2.2% with a call five years out. The coupon is a little lower than I'd like at 2.65%, but it's double-barrel and insured, so I'll take the risk that it won't be redeemed immediately upon the call date. I guess I'm working the other end of the market from Howie. I usually assume that a bond will be called before maturity ... if long-term rates take a solid bump upward, of course, I could be holding some low-yield paper here.

Mr_G, can you provide me with the Cusip on that bond. I can't seem to find it on Schwab. Thanks!

[Mr._Graybeard]

Quote:

Originally Posted by aja8888 Mr_G, can you provide me with the Cusip on that bond. I can't seem to find it on Schwab. Thanks!

Sure, it's 701600PF9. I bought at 101.574.

[aja8888]

Quote:

Originally Posted by Mr._Graybeard Sure, it's 701600PF9. I bought at 101.574.

Thanks, I'll see if Schwab has it listed.

[njhowie]

Here's one of mine that just passed the call date last month, has a respectable coupon, and will likely not be called prior to maturity in 2031. My YTM on it is 4.37%.

CUSIP 485321AN3 - Kansas Power Pool 4.6% 8/1/2031

Why won't they call? Issue size of 2031 maturity = $305,000. Issue size of 4% 2023 maturity = $790,000. Likely not worth the effort or costs to refinance such small amounts. On the other hand, since the amounts are so small, you'd think they might want to call and just pay them off. They have the cash available to do it, and they are generating positive cash flow annually. Who knows?

Looking at the trade activity, nothing since my purchase in November last year, and before that, nothing since January 2013 - the month after it was issued.

https://emma.msrb.org/Security/Details/?id=485321AN3

[Mr._Graybeard]

I agree -- the little numbers can get overlooked. On the retail side of the equation, when I started accumulating munis eight or nine years ago, I noticed that small blocs of bonds ($5,000 worth) sometimes sold at a small discount to the bigger amounts.

A week or two on the secondary market someone was selling one bond ($1,000) at a significant discount to what the rest of the issue was commanding. It sat on the market for a week or more -- nobody wanted to bother with one bond.

[njhowie]

Oh well, they called it.

https://emma.msrb.org/P21493543-P21156640-P21570940.pdf

[njhowie]

Return of Build America Bonds (BABs) and Advance Refundings...

https://finance.yahoo.com/news/build...060000347.html

[Mr._Graybeard]

Quote:

Originally Posted by njhowie Return of Build America Bonds (BABs) and Advance Refundings... https://finance.yahoo.com/news/build...060000347.html

Good news! Finally we're seeing some encouragement for infrastructure investment. Hopefully we'll see more activity in the muni market as a result.