Muni Bond (and Muni Bond Fund) Discussion

[jazz4cash]

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

My individual bonds are going up intraday, so far anyway.

 

[njhowie]

@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.

The swing on a percentage basis is going to be higher because the rate is lower. So, a 16% swing on 0.82% is 0.13%. If the 10-year were at 3%, that 0.13% would be about 4% swing. So it's all relative.

 

[npage]

Do you find the muni ETF's like MUB or VTEB to be fairly predictable as to what will happen with bond valuations at close each day?

 

[njhowie]

Do you find the muni ETF's like MUB or VTEB to be fairly predictable as to what will happen with bond valuations at close each day?

I don't track any funds or ETFs. However, you should be able to find something that will chart it over some time period, and then take a chart of the 10-year treasury over the same period, put them side by side or overlay one on the other, and have a good idea.

 

[npage]

Didn't even think of that. I just plotted VWAHX (Fund) vs. MUB (most widely traded muni ETF), they are nearly identical over any time period with VWAHX maybe lagging a day or two at most behind movement. Of course percentages and dollars vary but the line follows almost identical. I do not know how to post here.

 

[RobLJ]

In my brokerage account which holds my yearly withdrawal plus excess unused withdrawals (almost 100k), I own a chunk of Pimco's PDI CEF, largely for its high yield, although it is about 50% mortgage bonds not a muni. This is more like a volatile stock fund than a bond fund, save for the pretty reliable high distribution, so one needs to beware and prepare to hold. On that note, (do I contradict myself; very well then) I had PCI and swapped it for PDI to harvest the tax loss in March. They overlap some holdings but also have some differences. That will allow me to cash out a fund and gains tax free, probably next month.

The 10.7 yield is pretty sweet. Otherwise I have some muni CEFs yielding about 4.5-5.5% and 10k of Vanguard's Total Stock ETF, as well as a floating fund CEF. I have 20k in a short-term bond CEF that I can cash out at any time if I have an emergency (it was down about 6% in March but quickly recovered most of it's value over the next month or two).

These holdings pump out about a 6% average yield and at least the muni CEF yields are largely non-taxable which is nice for a taxable account. That's only 6k per year, but--hey--I'll take it. Barring an emergency, we're withdrawing about 20% more than we're spending per year, so the account amount and dividends generated should slowly build to the point that I'll add some growth ETFs or stocks in there at some point, probably after I start drawing SS.

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.

 

[njhowie]

Stay clear of non-traditional (garbage) munis...and probably the funds that throw money at them.

https://www.wsj.com/articles/more-h...lting-but-investors-still-want-in-11605272400

 

[Brat]

During my conference with my Fidelity advisor, she mentioned that I had a lot of cash and little in the way of bonds. My mother held individual bonds and having managed that at the end of her life I have determined that is not for me. Given the economic disruption on public entities as the result of Covid19, I will pass on munis. After poking around I found Vanguard Long Term Corporate Bond ETF, VCLT as a potential holding for our IRAs. Also in the mix is BLT, Vanguard's Long Term Bond ETF.

Opinions, please.

 

[Out-to-Lunch]

During my conference with my Fidelity advisor, she mentioned that I had a lot of cash and little in the way of bonds. My mother held individual bonds and having managed that at the end of her life I have determined that is not for me. Given the economic disruption on public entities as the result of Covid19, I will pass on munis. After poking around I found Vanguard Long Term Corporate Bond ETF, VCLT as a potential holding for our IRAs. Also in the mix is BLT, Vanguard's Long Term Bond ETF.

Opinions, please.

Why long term? Does that match the time horizon of your expected disbursement/liabilities? (If not, it seems like a risky move to me.)

 

[Brat]

The choices are ETFs. There is no way I would own an individual long term bond.

 

[Out-to-Lunch]

Sorry for the misunderstanding. I realized they were funds. It was the long-term part that I felt was risky, as well as corporates. I.e., sensitivity to interest rate rises, volatility, etc.

I guess it comes down to what role you envision these funds playing in your portfolio. In my view, bonds are to dampen volatility, and to be mildly uncorrelated with stocks. Ideally, their duration would match the time horizon of my expenditures. Long-term bonds are volatile, and corporates tend to be correlated with stocks. Their duration is long compared to the time frame I intend to draw upon them. So, all told, they don't play the roles that I want them to.

What role do you envision for them in your portfolio?

 

[njhowie]

During my conference with my Fidelity advisor, she mentioned that I had a lot of cash and little in the way of bonds. My mother held individual bonds and having managed that at the end of her life I have determined that is not for me. Given the economic disruption on public entities as the result of Covid19, I will pass on munis. After poking around I found Vanguard Long Term Corporate Bond ETF, VCLT as a potential holding for our IRAs. Also in the mix is BLT, Vanguard's Long Term Bond ETF.

Opinions, please.

Since you are specifically not looking at munis/muni funds and are looking for corporate funds/ETFs, your post might be more appropriate for a thread specific to corporate bonds.

Coming to a muni thread and saying "I do not want munis, give opinions on my corporate bond fund/ETF selections" is not the best approach to get the info you seek.

 

[jazz4cash]

There seems to be a paucity of offerings on Fidelity. Is there another place to search? Maybe I need to get an account at EMMA?

 

[njhowie]

Very slim pickings. For those that are available, the dealers are being extremely tight - not budging from their asks, except for being able to get 0.1 out of them here and there. Folks are still quickly jumping on questionable issues...not worth the risk for such low yields in my view, only slightly above other comparables. If I'm buying, I'm only buying quality (pre-re) at this time, and because there's no getting away from the low yields, I'm only going 2 or 3 years out at most.

I have a flood (but not a tsunami) of calls coming on 12/1 and kind of dreading it.

 

[njhowie]

Well, now I have proof how insane the muni/bond market is getting.

I mentioned how I was playing with the 100 year bonds. I just sold one for an insane price - 8 points above what I sold for yesterday. And it makes no sense, because the comparables are trading at better yields. I'm not complaining, but just making the point that people are doing ridiculous things in this market. Yield the buyer is getting on the 2113 maturity = 3.62% and it's taxable. It's a university bond, but classified as a corporate.

 

[Mr._Graybeard]

I agree, the market is nuts. About the only bonds I see with a reasonable yield are zeros, and I don't want to go there. And I don't want to go super long; my strategy has always been to hold until maturity or call.

Maybe another hiccup will come along and open up some opportunity. My forlorn hope.

 

[njhowie]

I am quite confident that there will be more hiccups and opportunities in the coming year.

I have picked a few of the super long zeroes - maturities in 2039-2052 range, only where I've found quality and protection.

I'm probably going to stay on the sidelines and not play with the 100 year bonds any more, unless they come down a good amount. I got lucky very quickly, will walk away happy. Under 3.6% for 90+ years? I have to believe that at some point the 10-year is going to get back to that level, and when that happens, those super long term bonds are going to come down a lot and have to be yielding above 5%.

 

[njhowie]

Earlier today:
(NYC) MTA CEO Pat Foye on need for federal funding to avoid national economic impact

 

[jazz4cash]

>100 yr bonds, you say? Sounds interesting.

>There's no fire sale on those NYC transit issues. The two I bought earlier this yr have appreciated nicely.

>About those zeros, I presume they are subject to the de minimus treatment for capital gains?

 

[njhowie]

>100 yr bonds, you say? Sounds interesting.

If you want volatility, both up and down with daily interest rate moves, it is the place to go.

https://finra-markets.morningstar.c...98461&startdate=11/26/2019&enddate=11/26/2020

Check out the last sale - mine. Along with all the other small ones over the past couple weeks...bought them all at ~112 and ~113, sold at ~120 and 129.999.

My thinking was to simply pick them up one or two at a time as it moved down, unload on the way up. They are corporates, so you can buy them one at a time if you want.

Here are a few of those CUSIPs I was playing with:
40728TAA1
95101VAA7
102291AA9 - also sold yesterday for quick profit since purchasing only two weeks ago. The two others above are better for trading in that there is more liquidity and are always near the top of the list off of the Fixed Income landing page (Corporate AA 30+ years). I was able to get rid of this one yesterday because I requested a bid and a dealer gave me that price (117, bought at 114)...which was actually a ripoff in that he turned around and reposted them at 128, though they sat there through the end of day with no takers. Why should there be? Mark to market is only 113.901. Again, insanity.

>There's no fire sale on those NYC transit issues. The two I bought earlier this yr have appreciated nicely.

With the interest rate situation, they should be fine, unless the day comes when they say they are skipping an interest payment. But again, as was indicated previously, and alluded to in the video clip, they are going to cut services and improvements first, along with tightening the budget further. Lastly, and though not mentioned in the video, again, there are (significant) fare hikes coming in 2021. I would also find it hard to believe a new administration would simply let major metro areas go down for the count, due to a situation which the federal government had a major role in causing.

>About those zeros, I presume they are subject to the de minimus treatment for capital gains?

Primarily in IRA, so no worries. For the others in taxable account, thankfully Fidelity handles it all with the Turbotax download interface and I never "see" it.

 

[jazz4cash]

Primarily in IRA, so no worries. For the others in taxable account, thankfully Fidelity handles it all with the Turbotax download interface and I never "see" it.

I need to be more cognizent of using my IRA funds for things like that. The zeros were catching my eye and I never even thought of using IRA funds. I may also be guilty of overreaction to the de minimus rule.

 

[njhowie]

With the 10-year treasury quickly racing to 1.1% I've noticed muni yields have firmed and moved a bit higher (prices weakening). Likewise, there's been a bit more inventory available - I've even been able to find a couple of decent purchases this past week.

On the flip side, I received 5 call notices during the week.

I don't believe this is the beginnings of a sustained increase in treasury rates. We've seen similar during Q1 the past few years, only to then see rates trail off the remainder of the year ending lower than where they were. With the new administration coming in, Yellen taking over Treasury, I believe this is all telegraphing what the remainder of the year and the coming four will have in store.

Graybeard - our Alaska Airports bonds are doing well - no call and the info they recently filed for 2020 looks extremely strong under the circumstances. The increase in cargo greatly reduced the impact of the drop in passenger traffic. Total operating revenue for the year was only down 4%.

https://emma.msrb.org/P11451580-P11125302-P11536510.pdf

The last table is very interesting - the top 10 airlines increased 20% in revenues, even with Alaska Air remaining flat. Again, pointing to the tremendous increase in cargo traffic.

We read this one right when we purchased.

 

[Mr._Graybeard]

Thanks for sharing that, Howie. Of course, if they do too well, they may want to redeem that 5% coupon and refinance their debt. But I'll gladly collect as long as they want to pay.

I don't know if I mentioned this, but I picked up a second (small, $5K) O'Hare bond in October, 4.375% coupon with a 2025 call date. Effective annual yield is around 2%, IIRC -- not exactly a windfall, but at least the money is working. I also bought an Illinois GO, 4% coupon, 1/22 call, at a 2% premium. Illinois is shaky, but the bond is insured, and I'm betting Illinois will call it fairly quickly. That would reflect my previous experience with Illinois state bonds.

Illinois' credit rating is approaching junk, but every once in awhile I see one that's insured, in this case by Assured Guaranty Municipal Corp. What's your opinion on the stability of bond insurers these days? They certainly took a pounding in 2008-09, but I think that was mostly in the mortgage market, not municipals. S&P and Moody's consider them stable, but previous experience suggests that those ratings aren't always reliable.

 

[njhowie]

What's your opinion on the stability of bond insurers these days? They certainly took a pounding in 2008-09, but I think that was mostly in the mortgage market, not municipals. S&P and Moody's consider them stable, but previous experience suggests that those ratings aren't always reliable.

The bond insurers are rated by Moody's and S&P the same way which bonds are. I think if there were serious potential issues on the horizon, the rating agencies would (hopefully) be out in front of it downgrading them, and that hasn't happened with the majority.

At the end of the day, my view is that we know munis are about as safe as you can get next to treasuries. We have 50 years of historic data showing it, we also have a fair number of indicators of which bonds are more likely to have issues. Even so, defaults are extremely rare, and even when there is a default, it's generally cured, and generally in full. How many defaults were there in 2008-2009 of rated issues? Even with Meredith Whitney calling for total collapse?

I believe only one bond insurer is suspect - National Public Finance (part of MBIA). I say that because they defaulted on fully covering Puerto Rico insured bonds they issued insurance on. They paid some portion, but it was significantly less than what they were fully on the hook for.

https://www.mbia.com/investor/ratings/2018_01_Moodys_downgrades_MBIA_Inc_and_NationalPFG.pdf

I also have some Illinois bonds - not at the state level, but specific cities/counties/municipalities. Some insured, a few pre-refunded issues. Nothing significant.

 

[Mr._Graybeard]

The bond insurers are rated by Moody's and S&P the same way which bonds are. I think if there were serious potential issues on the horizon, the rating agencies would (hopefully) be out in front of it downgrading them, and that hasn't happened with the majority.

At the end of the day, my view is that we know munis are about as safe as you can get next to treasuries. We have 50 years of historic data showing it, we also have a fair number of indicators of which bonds are more likely to have issues. Even so, defaults are extremely rare, and even when there is a default, it's generally cured, and generally in full. How many defaults were there in 2008-2009 of rated issues? Even with Meredith Whitney calling for total collapse?

I believe only one bond insurer is suspect - National Public Finance (part of MBIA). I say that because they defaulted on fully covering Puerto Rico insured bonds they issued insurance on. They paid some portion, but it was significantly less than what they were fully on the hook for.

https://www.reuters.com/article/bri...l-public-finance-guarantee-corp-idUSFWN1PC1BY

I also have some Illinois bonds - not at the state level, but specific cities/counties/municipalities. Some insured, a few pre-refunded issues. Nothing significant.

That was my feeling as well. I picked up several Illinois bonds (including a big O'Hare bond) in late 2016 when people were panic-selling them. I've had a couple called since then, but they have paid very well and also have rebounded in value.

I've also got a some New Jersey bonds i bought during a selloff a few years ago and they have followed the same path.