Muni Bond (and Muni Bond Fund) Discussion

[njhowie]

I continue receiving calls left and right. Between today and Dec 31, 15% of portfolio is maturing and being called and there's another ~25% which can be immediately called. I'm fully expecting 50% of those which are callable will be called by year end.

I received one call notice during the week for February (giving a few months advance notice).

I was only able to pick up a small amount of a few munis to reinvest in during the week. Two of them were pre-refunded issues offering 1.16%, 1.22% for 3 and 4 years respectively. The third issue I was able to pick up was 6.6% YTM for 6.5 years, but is callable in June 2021 for 2.02% YTC. I'm well-prepared that it will be called.

I have been working very hard, because of all of the calls on top of my regular maturities, but am finding it extremely difficult to find reasonable munis to reinvest in. Ones that I might purchase, but look iffy, are being taken relatively quickly, and I really don't mind. The wide majority continue to sport heavily negative YTC - and folks are gambling on them. I am also seeing a growing number which have given notice of being called/pre-refunded where Fidelity is not indicating that, and the dealers are still listing them at prices as if they weren't being called. So, any which you have your eyes on that can be called, you need to go to emma and verify that it is not being called (if you are paying a price indicative of that).

I have picked up some community bank preferred shares for a couple I follow very closely as they've gotten up in to 7%-7.5% yield and can be called in 2025. Certainly not munis, but I did invest in a similar community bank preferred issued in 2012 and did well with it up until it was called.

In NYC news - DD is moving back to Manhattan next week. She and future roommates got a great deal on a 3BR apartment for $1900/month - which was rented to prior tenants for $4000/month since 2017.

 

[Mr._Graybeard]

Anything that yields over 2% in the muni market over the short term is pretty rare these days. I see a few of investment grade, but the call date is way out there, eight or nine years. I'm reluctant to lock in that kind of yield, but maybe I'll get used to that over time as the new normal.

The other opportunities I see are bonds with low coupons, like 2%, selling below par. They have call dates at mid-decade, but their maturities are way out there, around 2040 and beyond. I don't see inflation kicking up over the short or even medium term, but 20 years out is impossible to forecast. I'd rather pay a premium for a higher-coupon bond that is likely to be called early.

I've seen a preferred for a regional bank in my area that looked pretty good as far as price and yield are concerned, but it was rated only Ba. I suppose you have to give up a little creditworthiness when moving into equities, but again, that will take some getting used to.

$1900/mo sounds pretty good! I know people who are paying close to that for an apartment in a fashionable Milwaukee neighborhood.

 

[njhowie]

Anything that yields over 2% in the muni market over the short term is pretty rare these days. I see a few of investment grade, but the call date is way out there, eight or nine years. I'm reluctant to lock in that kind of yield, but maybe I'll get used to that over time as the new normal.

Agreed. It is disheartening, but in the current environment, it's what we have to live with. jazz started another thread on alternative investments for cash, and I mentioned the U-Haul Investors Club there. I did actually/finally move forward with that, so we'll see how it goes. I made an initial investment and have set up auto contributions every two weeks.

The other opportunities I see are bonds with low coupons, like 2%, selling below par. They have call dates at mid-decade, but their maturities are way out there, around 2040 and beyond. I don't see inflation kicking up over the short or even medium term, but 20 years out is impossible to forecast. I'd rather pay a premium for a higher-coupon bond that is likely to be called early.

There are a couple of 100 year university bonds I've been playing with jumping in and out as they fluctuate with the interest rate moves. Both schools have endowments of ~$1B so I'm not concerned about their ability to pay or longevity. The coupons are 4.75% and they are AA rated. So I figure if I can make some money trading them, wonderful. If I get stuck holding them, I collect the interest. They have a fairly well-defined trading range and they are actually corporate bonds - so I can buy one at a time if I want. Not getting rich off of them, but considering interest rates/yields in general, the bar is set fairly low to claim success.

I've seen a preferred for a regional bank in my area that looked pretty good as far as price and yield are concerned, but it was rated only Ba. I suppose you have to give up a little creditworthiness when moving into equities, but again, that will take some getting used to.

In general, I do not see many preferreds with ratings. Those I have seen are generally no higher than BBB, maybe I've seen one that is A-. My guess is that in general, companies that are issuing preferreds are doing it because the cost of going with bonds would be higher for them - which could be because of their size, their business, or their creditworthiness. In general, it's a very rare occasion where a bank issues debt/bonds. It is common to see them issuing non-cumulative preferred stock in that they can count it towards their Tier 1 capital.

$1900/mo sounds pretty good! I know people who are paying close to that for an apartment in a fashionable Milwaukee neighborhood.

She's quite happy. They weren't sure if the rents would get down to their target price range, and very recently they had. However, the $1900/3BR were all in neighborhoods she wasn't thrilled about. This one is in a location that they are all real excited about - Murray Hill, on the East side, a few blocks South of the United Nations and Grand Central Station.

 

[jazz4cash]

]Anything that yields over 2% in the muni market over the short term is pretty rare these days.[/B] I see a few of investment grade, but the call date is way out there, eight or nine years. I'm reluctant to lock in that kind of yield, but maybe I'll get used to that over time as the new normal.

The other opportunities I see are bonds with low coupons, like 2%, selling below par. They have call dates at mid-decade, but their maturities are way out there, around 2040 and beyond. I don't see inflation kicking up over the short or even medium term, but 20 years out is impossible to forecast. I'd rather pay a premium for a higher-coupon bond that is likely to be called early.

I've seen a preferred for a regional bank in my area that looked pretty good as far as price and yield are concerned, but it was rated only Ba. I suppose you have to give up a little creditworthiness when moving into equities, but again, that will take some getting used to.

$1900/mo sounds pretty good! I know people who are paying close to that for an apartment in a fashionable Milwaukee neighborhood.

In consideration of individual munis paying +/- 2% my single state intermediate muni bond fund is starting to look "better" at ~2.4% distribution yield although that metric doesn't generally show up in the summaries. I'm leaning towards using it for a significant chuck of my money market allocation. I won't reinvest the interest payments, though. At some point I guess this fund will adjust to the "new normal" also but honestly don't know what the impact will be. Overall it seems the window of opportunity for munis is nearly closed for now and some other asset class will take a turn. I will be looking more closely at blue chip dividend payers, MYGAs, and learning how to buy preferred shares. More than anything else adjusting my expectations and being prepared to sit on the sidelines if the balance of risk/reward/effort is not to my liking. I'm lucky to not be dependent on a significant return from fixed assets.

 

[njhowie]

...and learning how to buy preferred shares.

quantumonline.com is one of the best resources for preferred shares. Provides info and links to the prospectus docs on sec.gov. Additionally they have a screen which provides all new preferred issues coming to market. To purchase through your broker, you just take the symbol and purchase like any other stock. The broker may have a slight variation on the symbol, but you'll figure out how they do it - if it doesn't come back when you enter the symbol, then use the symbol lookup function and when you see the first one, then you'll understand the brokers naming convention. For example, one preferred I purchased last week was UBP-H - that is how quantumonline.com has the symbol. If you go on Fidelity, they have it as UBPPRH.

 

[Mr._Graybeard]

In consideration of individual munis paying +/- 2% my single state intermediate muni bond fund is starting to look "better" at ~2.4% distribution yield although that metric doesn't generally show up in the summaries. I'm leaning towards using it for a significant chuck of my money market allocation. I won't reinvest the interest payments, though. At some point I guess this fund will adjust to the "new normal" also but honestly don't know what the impact will be. Overall it seems the window of opportunity for munis is nearly closed for now and some other asset class will take a turn. I will be looking more closely at blue chip dividend payers, MYGAs, and learning how to buy preferred shares. More than anything else adjusting my expectations and being prepared to sit on the sidelines if the balance of risk/reward/effort is not to my liking. I'm lucky to not be dependent on a significant return from fixed assets.

I've got quite a bit in a taxable fixed-income fund, PIMIX. They recently cut the dividend and nudged up the ER a bit. Compared to most investment-grade bond funds it's a bit volatile, but not as much as a junk fund. It has been pretty good to me over the years. I'm thinking of backing out of it -- I'll probably keep my position in an IRA, but the taxable amount I may redeem.

For quite awhile the fund made its money on interest rate swaps, but I've noticed the managers moving into mortgages. I'm not sure I'm too comfortable with that after the 2008 debacle. I'm sure the market is more cautious than 12 years ago when a borrower needed no money down and no proof of income to get a mortgage. I believe Daniel Ivascyn is a smart guy who is focused on preservation of capital, otherwise I'd be bailing now.

This isn't really a muni topic. Maybe I should start a new thread on PONAX/PIMIX, as it's one of Pimco's leading funds at this point.

Anyway, I don't mind having "idle" money if the investment opportunities don't look good. I don't see a point in locking money into an investment if the yield is 1% or less, and at this point in my life I don't need growth. I'll sit on the sidelines and wait for investors' hair to catch fire.

 

[npage]

As long as one can stand the volatility it might be argued a muni fund paying 3% right now will become very desirable driving the price up. That seems to be happening with mine now. As long as the fund holds the bonds it has today the payments should remain fairly constant assuming no mass refundings or defaults. As long as you are not in some crazy muni fund should not be an issue in a fund holding 1000's of bonds.

 

[jazz4cash]

As long as one can stand the volatility it might be argued a muni fund paying 3% right now will become very desirable driving the price up. That seems to be happening with mine now. As long as the fund holds the bonds it has today the payments should remain fairly constant assuming no mass refundings or defautls which as long as you are not in some crazy muni fund should not be an issue in a fund holding 1000's of bonds.

I rolled my eyes when I read that. I actually ran a screen on Fido looking for muni funds that pay over 3% and was shocked when it returned a long list.....but when I look at the distribution yield they end up around 2-3%. Some include the distribution yield on the summary page but most do not, perhaps due to price volatility. I find the SEC yield and other metrics unhelpful for my purposes and stick to distribution yield. I need that extra tax free yield bump to make it attractive.

The issue is if the muni funds get called away like Howie described how will the funds replace those coupons?

 

[npage]

VWAHX. If all the bonds get called, I agree with you. That said, how would a 3rd party such as you or me be able to know someone's cost basis in said Muni fund. The current yield listed may have no bearing on an individual who bought at lower levels. Unless I am missing something, which I am sure I will be grilled here soon enough for. I do not have the expert knowledge.

 

[njhowie]

As long as one can stand the volatility it might be argued a muni fund paying 3% right now will become very desirable driving the price up. That seems to be happening with mine now. As long as the fund holds the bonds it has today the payments should remain fairly constant assuming no mass refundings or defaults. As long as you are not in some crazy muni fund should not be an issue in a fund holding 1000's of bonds.

The problem is that the 3% is across all the holdings of the fund. So you have to figure there are going to be some number of them yielding 4% and higher. The difficulty is that any "high yielders" are going to be called by the issuer as soon as they can - I'm speaking from experience here being smacked around weekly with call notices. So the highest yielding bonds in the portfolio will likely be redeemed and then they have to reinvest in what's currently available. 3% could lead to a higher price, but at the same time, you should expect that the distributions are likely going to be reduced to what munis of the fund's duration are currently yielding. To get 3% you have to go out pretty far on the yield curve - probably 15+ years for mediocre quality at this time.

 

[npage]

Makes sense, then the price comes down. I would just hold and likely wait for a much lower point and probably buy more actually. It really all comes down to what is the better option at a given risk profile? I have no desire to withdrawal any for 5 years at least so I can ride it up and down and all around. I am not interested in selecting and holding individual bonds.

 

[njhowie]

You definitely do need to be careful - because when you least suspect it, the interest rates will head higher, and although that will mean higher distributions in the future, the fund is then stuck holding all of the lower yielding stuff it is picking up now and going forward to the point which interest rates turn higher...and nobody will be looking to call these issues. So, as the interest rate heads higher, for some period, you can expect NAV to go lower - to keep yield in line with market interest rates.

The bond bears have been predicting this "doomsday" scenario for bond bulls for some time now, and it hasn't happened...yet.

 

[jazz4cash]

VWAHX. If all the bonds get called, I agree with you. That said, how would a 3rd party such as you or me be able to know someone's cost basis in said Muni fund. The current yield listed may have no bearing on an individual who bought at lower levels. Unless I am missing something, which I am sure I will be grilled here soon enough for. I do not have the expert knowledge.

I’m no expert either and the purpose of the thread is to share ideas and learn. I don’t think VWAHX is a muni fund, is it? I think it’s a high yield (junk) fund too which I avoid. I need that extra tax free yield bump. Plus munis seem to be more stable/less volatile than taxable issues. I don’t worry about anybody else’s cost basis but you make a good point...I should calculate distribution yield based on my cost basis, not NAV.

EDIT: I see I was wrong to say VWAHX is not a muni fund.

 

[npage]

I’m no expert either and the purpose of the thread is to share ideas and learn. I don’t think VWAHX is a muni fund, is it? I think it’s a high yield (junk) fund too which I avoid. I need that extra tax free yield bump. Plus munis seem to be more stable/less volatile than taxable issues. I don’t worry about anybody else’s cost basis but you make a good point...I should calculate distribution yield based on my cost basis, not NAV.

Yeah, it is a fund. I am not sure "high yield" is the best term for it, just what they call it, and "junk", not so much. Maybe to some, but I tend to think not looking at the holdings. I see calculated risk holdings in there. For instance you will see Chicago and Cook County, some O'hare. Some will run at the sign of that, others may say, nice holding for the extra juice. And without knowing the bond details specifically I can't know, that's why I trust them.

2,785 bonds, 6.5 yrs. duration, 85% Triple BBB or better. I've held this one thru ups and downs, last year they surprised with a capital gain distribution.

All that said I would like it at a Share Price of closer to $11.25. My basis is somewhere between there and where it sits currently. Seems though for years now if it gets that low it bounces back up quick. Money flows to it perhaps chasing yield. To NJhowies's point if they are unable over time to replace that yield, well....they will be no different than anyone else.

That said, have a look at Vanguards site, they are very detailed in listing what it holds. I actually think using "high yield" is a tactic to scare people away, just kidding, but it clearly is not the risk profile based on holdings as what I think of as some junk high yield funds. YMMV>

 

[jazz4cash]

In light of the earlier comments wrt to call activity, I reviewed my bond portfolio (5 issues) and I am in pretty good shape. Maturities are 1-19 yrs and calls are 5-7 years out. Avg coupon 4.4%, YIeld 2.85%, duration 11 yrs. I assume there are extraordinary call provisions that could be invoked based on distressed condition of municipal finances but I am ok with that risk and we are supporting the public by investing in these securities. I have health, education, and transportation issues.

 

[npage]

I don't even know the process how one would buy an individual muni bond? Do you call your broker and tell them what you are looking for?

 

[jazz4cash]

I don't even know the process how one would buy an individual muni bond? Do you call your broker and tell them what you are looking for?

You could do that but we’re mostly DIY’rs here. I use fidelity search tool. Fido and VG both have a cool table of yields for various fixed income types vs maturity. You can click on a yield and the table for that specific investment pops up. Then sort by various metrics. If you read this thread and the similar one, you’ll pretty much know the process.

http://personal.fidelity.com/products/fixedincome/pdf/yield_table_learn_more.pdf

 

[jazz4cash]

Here’s the other similar thread.....

If I buy or sell a bond on the secondary market, how is the dividend allocated?



Let's say it's a semi-annual dividend payable Jan 1st and Jul 1st. I buy the bond on April 1st (e.g. 1/2 way through the dividend period). Does the seller get 1/2 of the dividend payable Jul 1st? If so how and when is the payment made?



Thanks

 

[npage]

Wow, neat tool. Thanks.

 

[Mr._Graybeard]

I buy bonds through Schwab, which also has a good online trading site. At one time their bond desk would cold-call me occasionally if they ran across something they thought I might be interested in, but I haven't heard from them in years now.

 

[jazz4cash]

My very first muni was bought on a pure cold call from a regional broker that specialized. It was an OK outfit but my impression was that it was like a boiler room operation. They only called when they had something to sell, never left messages, and never had anything even close to that 1st purchase. They did me a favor getting me into the water but I was too small for them so I transferred the bond to Fidelity.

 

[npage]

Why am I reminded of some guy in Wolf of Wall Street calling you? JAzz4cash, have I got a deal for you, a small start up town of 4 people is issuing once in a lifetime bonds. ;-)

 

[njhowie]

You definitely do need to be careful - because when you least suspect it, the interest rates will head higher, ...

10-year is currently up 16% today to 0.953% - look for bond fund NAVs to fall when valued after market close.

 

[npage]

@NJhowie, are these swings more extreme than your historical experience? I read bond buyer a few times a month until it tells me I have to pay to read further. I would call the tone there not paniced. Actually calm compared to what I think Municipalities will face but I get that does not mean major defaults everywhere.

 

[jazz4cash]

Why am I reminded of some guy in Wolf of Wall Street calling you? JAzz4cash, have I got a deal for you, a small start up town of 4 people is issuing once in a lifetime bonds. ;-)

I have no recollection and no clue how they got my number but the guy must’ve been pretty good (eg not pushy) to get me to act. It was a State Univ Hospital revenue issue. 22 yrs @ 4%. purchased at par. BORING.