Muni Bond (and Muni Bond Fund) Discussion

[imbatman]

Great points - in my taxable accounts, I need NON-taxable income......but in my NON-taxable accounts (i.e. Roth, HSA) which I won't be accessing for some time, I am happy to get my return via either income or purchase discount (repaid on redemption).

Inventory is SPARSE right now. But the Raymond James newsletter has helped me the last few weeks with some commentary and advice - (1) don't forgo 4.5% just because you missed 5.0% and (2) this is a dried up time for muni inventory traditionally and particularly for this year.....and inventory may improve in late Jan / Feb.

https://www.raymondjames.com/-/medi...ghts/bond-market-commentary/bond_investor.pdf

 

[jazz4cash]

Lastly, if you do focus on this approach, most of your returns will come from the increase in value over time rather than interest income. That means you are sacrificing cash flow and really need to hold to maturity or sell to realize the YTM. Personally, I don't care how my YTM is arrived at, I'll hold no problem. However, some folks are going to want the higher income along the way for one reason or another.

Yes, that is the primary attraction. Those capital gains would treated as ordinary income for tax purposes outside of a Roth. As you say I don’t care where the yield comes from. As for timing I am now starting to see a few new issues that are close to my expectations for my taxable account.

 

[imbatman]

....capital gains would treated as ordinary income for tax purposes outside of a Roth. ....

Sounds like you are aware of the minimis rules.....before rates got so high, I did rarely purchase a little higher returning (but lower yielding) TE munis in my taxable account and account for my total return by expecting taxable CAPITAL gains.......but with rates higher now, I haven't been able to find many where the sale/ redemption gain would not be taxed at ORDINARY income rates, which can be killer in a state taxing like MD (very familiar unfortunately).

Plus with most munis being issued callable, you may not even know going into it what your holding period will be, which will affect your capital/ ordinary calculation (discount accretion, discussed in Fidelity article below). I guess if you calculate worst case of having a first call date maturity (relative to the de minimis calculation), that would tell you your worst return.

https://www.fidelity.com/bin-public...documents/fixed-income/de-minimis-dilemma.pdf

 

[socca]

Here is the latest muni yield curve according to Vanguard's muni bond funds (7-day or 30-day SEC yield; TE = Tax Exempt):

VMSXX - VG Money Market TE - 4.3%

VMSUX - VG Short-Term TE - 3.2%

VMLUX - VG Limited-Term TE - 3.2%

VWIUX - VG Intermediate-Term TE - 3.4%

VWLUX - VG Long Term TE - 3.7%

VWALX - VG High Yield TE - 4.1%

Inverted, and remarkably flat out to high yield.

This is not a recommendation to buy. Some folks like data.

 

[imbatman]

Thanks, data points are always great. ACTUALLY seeing VMSXX......this got me thinking about something else that has been in the back of my mind and hadn't acted on. Any of you using Muni Money Market MFs instead of the default in your taxable accounts at your broker?

I am at Fido so have SPAXX (5.0% yield) for free cash, but they have FZEXX with a 4.05% TE yield, which would definitely be better after taxes. Any downsides to using this in my TAXABLE account? I mean other than having to manually sell/ buy your shares rather than sweep? I assume it accrues daily per normal MM.

https://www.fidelity.com/mutual-funds/fidelity-funds/municipal-money-market

 

[njhowie]

I'm noticing a higher number if housing related taxable munis being offered in the secondary market. Maybe doesn't mean anything, maybe some insight into future events? In any case, it caught my attention.

 

[imbatman]

yeah I check these (taxable) every day and have made some nice opportunistic purchases for credit quality/ duration/ yield that is higher than corporates/ agencies....time will tell how some of these extraordinary redemption provisions weigh out but good for now

 

[Mr._Graybeard]

I'm noticing a higher number if housing related taxable munis being offered in the secondary market. Maybe doesn't mean anything, maybe some insight into future events? In any case, it caught my attention.

In Milwaukee a number of underused buildings are being converted into apartments, and I know that a lot of that work is getting financial support from the city housing authority.

My old employer, the Milwaukee Journal Sentinel, had a gem of a downtown building kitty-corner from the venue where the Milwaukee Bucks play. Of course the newspaper's staff has dwindled dramatically, and the paper's new owner, Gannett sold the building for conversion into apartments. The flats are mostly for singles and young couples, so fairly basic.

 

[Mr._Graybeard]

yeah I check these (taxable) every day and have made some nice opportunistic purchases for credit quality and yield that is higher than corporates/ agencies....time will tell how some of these extraordinary redemption provisions weight out but good for now

IME, housing bonds seem prone for fractional extraordinary calls over time, especially those involving single-family housing. But in this rising-rate environment, that trend may be reduced. I know I have several non-housing bonds that have passed their initial call date -- five years ago they would have been redeemed immediately.

 

[imbatman]

Some nice TAXABLE muni new issues today in Fido. Ex. AZ4500CJ3 - KY HSG 30-year (9-year call protection) @ 5.795%. Similar version from NC HSG AA1, just slightly lower yield - AZ2600CH7.

I find these to be nice safe low-risk for a Roth.

 

[jazz4cash]

IME, housing bonds seem prone for fractional extraordinary calls over time, especially those involving single-family housing. But in this rising-rate environment, that trend may be reduced. I know I have several non-housing bonds that have passed their initial call date -- five years ago they would have been redeemed immediately.

I agree if they are mortgage bonds but most of the ones I’ve looked at are for rentals to students, seniors, low income and public service employees. Bought my 1st home with a state bond program for 1st time buyers. Paid it off in when we moved 4 yrs later.

 

[njhowie]

I agree if they are mortgage bonds but most of the ones I’ve looked at are for rentals to students, seniors, low income and public service employees. Bought my 1st home with a state bond program for 1st time buyers. Paid it off in when we moved 4 yrs later.

I would stay away from any university bonds for student housing...unless maybe there was bond insurance backing them. If you read the fine print of the official statement, you may find that the interest/principal comes out of the housing revenues and nothing else. A couple years ago, University of Oklahoma defaulted on one of their issues. They used the funds to build luxury student housing and nobody wanted to live there. They declared the project a financial failure and terminated the lease arrangement, which they claimed was totally within their legal rights.

So, when you see universities doing this thing where there is some LLC or corporation/trustee created for the sole purpose of a housing project where some entity is actually leasing the facilities and can terminate, be extremely skeptical that the rating may not be as strong as advertised. I'm guessing it would be the same with other intermediary trustee arrangements like this in general if a project should not perform as hoped.

https://www.bondbuyer.com/news/double-cross-on-p3-will-cost-oklahoma-bond-trustee-warns

 

[jazz4cash]

The weird WI based agency that Mr Greybeard warned us about was issuing out of state munis for student housing also. It’s a very different form of risk compared to mortgage bonds being prepaid.

 

[imbatman]

Had an interesting one today, one of my callable agencies 3130AWMM9 showed up this morning as having a "principal payment" in Fido, even though no call notice or alert had been issued. They also did not "repay" all my holdings, only partial. I called Fido and they took a good while to figure it out and said it does happen occasionally and while "principal payment" is not technically a "call" (reason why I got no notification), the end result is the same.

Just FYI

 

[imbatman]

For those of you with FIDO, they just published a nice report on Muni defaults / credit issues in 2023 with a table of their issues. All were unrated by Moodys but still good to see where things are shaking up a little:

https://digital.fidelity.com/ftgw/digital/firesearch/api/sectorreport?docid=PBM_1394093

 

[jazz4cash]

For those of you with FIDO, they just published a nice report on Muni defaults / credit issues in 2023 with a table of their issues. All were unrated by Moodys but still good to see where things are shaking up a little:

https://digital.fidelity.com/ftgw/digital/firesearch/api/sectorreport?docid=PBM_1394093

Thanks. Very interesting. I see one is a GO which is a shock but seeing they are all unrated is reassuring I think. Need to read and dig in a bit.

 

[Mr._Graybeard]

I'd bet the Dahlonega Senior Living default listed as a Wisconsin bond is part of the Wisconsin Public Finance Authority portfolio.

 

[jazz4cash]

I'd bet the Dahlonega Senior Living default listed as a Wisconsin bond is part of the Wisconsin Public Finance Authority portfolio.

Is that the oddball agency that isn’t actually state run?

 

[Mr._Graybeard]

Is that the oddball agency that isn’t actually state run?

Yes. The fact that the debtor is out of state (in Georgia) is the giveaway.

 

[imbatman]

They definitely issued some for that facility in the past (2020A – 74443UCJ0; 2020B – 74443UCK7), but hard to tell if those are the same as defaulted in the newsletter since Fidelity provides no CUSIP.

 

[jazz4cash]

I did not realize there were unrated bonds. I think they are issues that way.

 

[imbatman]

So got my first VERY EARLY partial call notice on some MD HSG AA1 5.75% bonds today that were just issued 08/15/2023 - listed as 31YR with no call until 2032 (at Premium).

57419T2S9 was issued $34.15M at $108.169. They are calling $285K (my share of the early call is $5K) on Feb 28, 2024 under the "special redemption" provisions that many of these HSG munis have. I didn't buy at that high amount of the offer price, but I did pay a premium so not ideal (the prospectus does indicate the prepayment of loans causing an early redemption will not result in paying any call premium, and that is likely why it appears these will be called at $100.00....so a pretty big loss if anyone bought at list).

I was expecting early but not THIS early ha ha. Anyhow, good learning for me so sharing for others.

 

[Montecfo]

Just noticed my favorite muni bond closed-end fund, Nuveen Municipal Value (NUV), is trading at a 6.5% discount.

In a declining rate I would expect values to rise and the discount to narrow which could make for a pretty nice total return and much of it tax free. Distribution yield about 4%.Check out Morningstar and Nuveen's website for more.

I do not own it currently.

 

[imbatman]

I have started buying opportunistically on a couple of CEFs - NVG (non-taxable) and BBN (taxable). Both are up for me and paying monthly, but my thesis is the same as yours.....the discount on muni CEFs appears significantly higher than normal so as people (like us) start scavenging for alternatives, these should rise too.

 

[imbatman]

Had another 30-year (2054) HSG (Ohio) muni just issued August 2023 already facing extraordinary redemption in March 2024, in spite of first call being 2032.

https://www.munifilings.com/munifilings/multiThreaded.do?method=DIRECT&fileType=MAVEN&list=P55181

These really starting to have a short life.