Muni Bond (and Muni Bond Fund) Discussion

[Truckinalong]

Municipalities will survive but keep in mind they tend to report financials 12 months behind. I don't think current ratings reflect the sheer impact of lost tax collection and increased covid responses. I walk around the city and I see all the shuttered hotels, restaurants, convention halls, people out of work and the lack of dollars and subsequent sales tax not being generated it is hard to wrap my head around how it ends. Just one guys opinion.

 

[njhowie]

The rating agencies act in advance of the release of financials. Most municipalities have been providing updates the past few months and the ratings agencies have lowered ratings and/or placed issues/issuers on credit watch with negative outlook where appropriate. I don't believe anyone is oblivious to the current situation. Though different, the municipalities are in a stronger position today than 2009. Additionally, we have all-time low interest rates and enormous market demand even at these low rates. As a result, look for everyone to refinance any outstanding debt at/above 4% and issue as much new debt as necessary to get through the downturn.

 

[Truckinalong]

I think some are oblivious.

 

[COcheesehead]

Municipalities will survive but keep in mind they tend to report financials 12 months behind. I don't think current ratings reflect the sheer impact of lost tax collection and increased covid responses. I walk around the city and I see all the shuttered hotels, restaurants, convention halls, people out of work and the lack of dollars and subsequent sales tax not being generated it is hard to wrap my head around how it ends. Just one guys opinion.

A few points...
For my individual bonds I see quarterly financials, not just 12 months.
Muni bond revenue is diverse, from rents, to service fees, to tuition, property tax, water fees, tolls, and well you get it.
Lastly, the rating agencies provide forward looking guidance for each muni environment.
An educated, experienced muni bond investor will take these and other aspects into account when deciding to buy or sell rather than just walking around.

 

[Truckinalong]

I get it. As I said just my opinion based on the fact that even the most experienced investor alive today or rating agency (they are never wrong) has never seen a scenario like this and everyone is still literally guessing for how long this goes.

I think there are great opportunities in muni land for sure but will be glad to sit on side line for a bit and pick spots down the road.

 

[COcheesehead]

I get it. As I said just my opinion based on the fact that even the most experienced investor alive today or rating agency (they are never wrong) has never seen a scenario like this and everyone is still literally guessing for how long this goes.

I think there are great opportunities in muni land for sure but will be glad to sit on side line for a bit and pick spots down the road.

The deals of the year, maybe even for the next two to three years, were had in March. There were a couple days of fire sale pricing that I was happy to snatch up. Best muni deals I have seen in a while.

 

[njhowie]

I think some are oblivious.

Clearly I subscribe to no market timing like most here. That said as I look at my muni fund currently down 8.9% and probably 11% tomorrow the way this is going can't help but think to lock in loss at least for tax purposes.

I have no crystal ball and can't see Muni's suddenly rising and can just buy it back at same level or lower in a month or more. Meantime lock in $3,000 a year in loss carryforward for many years to come.

That was 3/22. You sold at the exact time when you should have been buying (more). What you did was the very definition of market timing - sold on a particular day, with the specific intent to repurchase at a lower price within a specific timeframe.

If you just sat and did nothing, you'd be in a much better position today - and not have locked in that $3,000 a year loss carryforward for many years to come.

And you've solidified the view of most everyone on this thread - stay away from muni funds...you can easily lose money in them.

 

[Truckinalong]

Yeap, learned some lessons there. That said I was able to buy back in while fund was down after wash rules, so I kept the loss, rode it back up 6.5% (the 10% I was down was from peak value, not my cost basis) and got out offseting against the loss for almost (almost) no tax on the gain for now to align with some short term money goals. That 6.5% is about 2 years interest in that fund.

Again I am not advocating market timing or being an expert. I just don't like the risk profile for me right now. As to funds, I don't think most can do as well as you due to lack of tools, knowledge, access or desire and there is a place for muni funds for many depending on their goals.

I am shocked how fast they regained their value from the 3/23 drop and I think that will happen again. That said if someone was not concerned about the principal bouncing around and was content with a well rated fund throwing them the monthly income they need, I stand by my thoughts given unattractive yields elsewhere.

 

[jazz4cash]

Last night I found a large qty of AAA muni bonds yielding 2% non callable for 3 yrs. This morning they are yielding .14% I only see a few trades at the 2% yield so I am trying to figure out what happened. CUSIP is 574204L35

 

[njhowie]

Last night I found a large qty of AAA muni bonds yielding 2% non callable for 3 yrs. This morning they are yielding .14% I only see a few trades at the 2% yield so I am trying to figure out what happened. CUSIP is 574204L35

Buyer bought them near market close yesterday, woke up this morning, marked them up and put them out there to sell. He realized he was getting a bargain at 109...I see a sale just went through for 125 at 114.687.

 

[njhowie]

I was gifted 101434AU2 this afternoon at 100.0 (100.1 with mark up) - dealer stole it from seller at 99.088, then gave it to me. It's been called for October 1, but it gives me 3.63% effective yield for a month. The best one month brokered CD rate is currently 0.05%.

 

[jazz4cash]

I was gifted 101434AU2 this afternoon at 100.0 (100.1 with mark up) - dealer stole it from seller at 99.088, then gave it to me. It's been called for October 1, but it gives me 3.63% effective yield for a month. The best one month brokered CD rate is currently 0.05%.

Tough way to make a buck.

 

[njhowie]

Tough way to make a buck.

True, but again, beats it just sitting in the brokerage account earning nothing and is a no risk alternative.

 

[Mr._Graybeard]

I had one called today for the Philadelphia school district. Coupon was 4%, I had it for quite awhile. It was a building bond that was underwritten by the state. I keep an eye out for PA school bonds like that but haven't seen any others that I considered a good buy.

I also got a call notice for a corporate bond I hold from Andeavor Petroleum. It has a nice yield, 5.375% coupon, but I won't miss it. The S&P rating was a little iffy.

 

[njhowie]

I had one called today for the Philadelphia school district. Coupon was 4%, I had it for quite awhile. It was a building bond that was underwritten by the state. I keep an eye out for PA school bonds like that but haven't seen any others that I considered a good buy.

I also got a call notice for a corporate bond I hold from Andeavor Petroleum. It has a nice yield, 5.375% coupon, but I won't miss it. The S&P rating was a little iffy.

Indeed - many calls taking place. Again, my view is anything over 5% is almost guaranteed to be called, unless the issuer is in deep financial trouble and is unable to refinance lower.

I got a call notice on 64971M4N9 last night - it's a AAA 5.8% (taxable) NYC muni which was callable as of August 1, being called on October 1.

 

[njhowie]

Having lots of difficulty gettng anything past couple weeks. Though I was able to get one just at the close today - past call date, can call with 30 days notice, my YTC will be negative 0.4% if they announce call tomorrow and breakeven will be 2 days after that. Beyond that, I'll be collecting 5.4% with maturity 8/1/2024. I paid 100.352 (+0.1 markup).

https://emma.msrb.org/Security/Details/04144RBK4

Today was especially unique right from the open. My saved queries retrieve the taxable munies and sorts them from high YTM down. What happened is that some dealer put small lots of a bunch of bonds out there, all with near-term call dates before year end and priced them in the 102-103 range giving YTC of anywhere from negative 10% to negative 25%. A number of issues. Until recently, Fidelity would not let you purchase any muni online with a negative YTC, you had to phone it in. In the past couple weeks they eliminated this...to a degree. Today, it would not allow placing a buy for any of these with big negative YTC. Now, in the same vein - I own one where a dealer had marked it up with ridiculous negative YTC. So I figured, heck, I'll just put mine out there 0.1 below his offer. No dice - Fidelity will not let you place a sell with negative YTC! Considering the situation with rates, they should be allowing purchasing or selling at any price the investor likes. For those with negative YTC which it is allowing, it puts up a warning/confirmation screen first which you have to acknowledge before allowing to click the submit button.

 

[jazz4cash]

So do you think dealers are just throwing stuff out at “low” prices to catch people that are not paying close attention, or is it a market for people like you that want to take a chance on the issuer not calling the bond?

I’d feel pretty good about lending to Arlington County VA under any circumstance but long term funding for a parking and skating complex gives me pause.

 

[njhowie]

So do you think dealers are just throwing stuff out at “low” prices to catch people that are not paying close attention, or is it a market for people like you that want to take a chance on the issuer not calling the bond?

I think it's a little of both...those not paying attention are looking at yield to maturity almost completely ignoring YTC. For those like me, to pay so much above face value...I'm not sure what they're thinking. I did watch them all day long yesterday, and none sold. Dealer has once again put them out there at the same prices. Go have a look if you have the time (I used tinyurl to cut down the size of the query):

https://tinyurl.com/y6l2nu8e - look at the ones at the top in the first 15 or so offered at 102, 102.5 and 103.

I’d feel pretty good about lending to Arlington County VA under any circumstance but long term funding for a parking and skating complex gives me pause.

Though the funds are for parking/skating complexes, the county is on the hook to fund the interest/principal regardless of how those projects perform. I went through their financials and they are very strong with $1B cash, and it is only 4 years to maturity, if they don't call sooner. I'm really just gambling on the next 32 days.

 

[njhowie]

For those who don't use Fidelity, I took a screen shot.

 

[jazz4cash]

I thought there would be an attribute to indicate these are taxable. I'll have to be very careful about that

 

[njhowie]

I thought there would be an attribute to indicate these are taxable. I'll have to be very careful about that

Well, I chopped off the query parameters on the above right. In the search criteria I do have "Federally Taxable" set.

But your point is valid. If you look on the New Issues screen, they do include a TE/TAX attribute for those which are tax exempt/taxable. However, on the query result screens they do not.

 

[jazz4cash]

If you like NYC Trans Authority there is certainly no shortage of issues that are attractive. I'm seeing 3-5 yr issues offered in small lots at >3% yield. These have recently dropped to BBB+. If I had funds, I'd pick up a couple. I already have two that are 14 mos and 4 yrs to maturity so I'd consider other maturities, but it's a bit unsettling to see so many issues from a single agency. A few months back it was a lot more issues from NJ which were rated lower than NYC (before the ratings for NYC dropped). I don't have the skills to analyze their financials, but I do have confidence that they will not default.

 

[njhowie]

As I mentioned previously my uneasiness with the term "dire" which they have thrown around, since then the messages coming out of MTA have been as bad and that is why you are seeing so many issues of all maturities across the board.

My belief is that they are trying to play out the clock for the next two months and hope a new president takes office as Albany/NYC are coming to the realization that the current president does not intend to send any further Federal funds.

In the interim, MTA has announced that they are planning cuts in system service, personnel, planned upgrades, and more. They are going in to austerity mode. There will likely be issues along the way as the TWU has to go along with whatever is proposed - and there are assured layoffs coming.

The low interest rate environment may provide some relief if they can call/refinance as the bonds reach their call dates. I know there are issues with approaching call dates between now and year end. The question is what kind of rates can they get in the market at this time based on their current condition and messaging? They may be able to take advantage of selling new bonds directly to the Federal Reserve.

 

[Mr._Graybeard]

If you like NYC Trans Authority there is certainly no shortage of issues that are attractive. I'm seeing 3-5 yr issues offered in small lots at >3% yield. These have recently dropped to BBB+. If I had funds, I'd pick up a couple. I already have two that are 14 mos and 4 yrs to maturity so I'd consider other maturities, but it's a bit unsettling to see so many issues from a single agency. A few months back it was a lot more issues from NJ which were rated lower than NYC (before the ratings for NYC dropped). I don't have the skills to analyze their financials, but I do have confidence that they will not default.

I bought a couple of the TA bonds, but I don't intend to buy any more at this point. There's still a greater-than-normal risk to that debt, IMO.

Airport bonds look to be holding pretty steady, although I'm sure their cash flow is still severely reduced. They were among my favorite buys in the past, so I hold a handful. As I previously mentioned, I recently bought some Alaska airport debt because they handle a lot of freight.

 

[njhowie]

Anything new from anyone?

Taxable muni market is pretty much untouchable. Risk/reward simply is not there - nothing to buy.

In the tax free, I do see some AA-rated long term zero coupons, many with insurance backing, that are catching my attention which the market is beginning to stay clear of. I'm guessing there is higher perceived risk, but my thinking is that with a longer time horizon, there is greater opportunity for things to work themselves out. I'll have to consider that position in more depth.

With my money that is looking for a (new) home (and another chunk of maturities and calls coming on 10/1), I've begun nibbling on bank common and preferred shares. Folks are avoiding the sector, and prices have come down so far that most of the community banks are ripe for takeover. Just yesterday, one that I have (symbol STND) announced it was being acquired for 70% premium (all cash deal) above current share price. Dividend yields of 5% to 8% are quite easy to find right now, and these are well-covered sustainable dividends. Look for those trading well below tangible book value with lots of insider purchasing and you've got a good safety net. Historical takeover price is 140% of tangible book value, which is exactly what STND is being acquired for. I also look at a high ratio of deposits to market cap - acquirers like to capture deposit hoards on the cheap. I did very well playing this during 2012-2017 and it looks like the same thing all over again...possibly with even greater gains possible. We have banks on sale + cheap money which leads to increased M&A activity. Anyhow, I'm not going all in on the sector, but redeploying interest payments and some amount of maturities and calls into new purchases which cannot find anywhere to go in munis. Obviously CDs and treasuries are pretty much untouchable at this time as well.

Sorry for going off-topic with the banks. Just another area which I've done extremely well with during difficult economic times where the whipping of the sector gets overdone.