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jazz4cash 05-24-2020 04:01 AM

Muni Bond (and Muni Bond Fund) Discussion
 
I am starting this thread to satisfy the interests of any members like me that wish to delve into the Muni Bond asset class. It's a a carryover from the "Bond Dividend Allocation" thread that started with a simple question and went deep into some nuances of the asset class. You can see the full thread here:
https://www.early-retirement.org/for...on-103139.html

njhowie 05-24-2020 07:10 AM

You know COCheesehead and I will be here, though I believe 98% of all others who join will be muni bond fund folks.

Now, there was an article just posted discussing muni bonds and the (potential) desirability of them at this time. It's written by Mark Hulbert, who I rarely agree with on his market ruminations in general.

https://www.marketwatch.com/story/ma...ket-2020-05-22

A key point in the article:

Quote:

Notice that throughout the maturity spectrum investment grade bonds are yielding more on an after-tax basis than comparable munis. From this you can conclude that one of two things must be true:

ēInvestment grade corporate bonds are better bargains right now than munis;

ēThe default risk for issuers of investment grade corporates is significantly higher than for munis.

Itís beyond the scope of this column to take a position on which of these two is the correct answer. But what this discussion does is focus your attention on the right questions to ask. If youíre comfortable that default risk isnít higher for corporates than for munis, you would want to favor investment grade corporates for the fixed income portion of your portfolio. To the extent you donít, munis become increasingly attractive.
However, we do know the correct answer, that corporate default risk for comparably rated bonds is orders of magnitude higher than for munis - see Exhibit 23 on Page 23:

https://www.atlasca.com/wp-content/u...-1970-2017.pdf

target2019 05-24-2020 08:24 AM

One move I'd like to make in the near future is to trade out shares of USTEX (USAA Tax-Exempt Long-Term Fund) for an ETF such as MUB (iShares National Muni Bond ETF).

USTEX expense is .48: MUB .07
USTEX avg. maturity 10 years; MUB 5.47 years

What other characteristics should I consider?

Are there other ETFs I should compare to MUB?

brewer12345 05-24-2020 08:57 AM

I think that in this environment it is wise not to be too complacent about muni credit risk. This downturn is unlike past recessions and it may be hard to predict what happens based on history. Particularly if you are buying individual bonds, it would be a good idea to do some credit work to understand the risks you are running.

njhowie 05-24-2020 10:09 AM

Quote:

Originally Posted by brewer12345 (Post 2434131)
I think that in this environment it is wise not to be too complacent about muni credit risk. This downturn is unlike past recessions and it may be hard to predict what happens based on history. Particularly if you are buying individual bonds, it would be a good idea to do some credit work to understand the risks you are running.

Certainly!

Similar to this downturn being unlike past recessions, we have a Federal Reserve on record that they will provide as much money to the system as necessary to stabilize things. There will be a lot more money coming, for cities and states as well. The Fed is now purchasing municipal bonds. In doing this, they are allowing lots of new issuances to come to market at historically low yields, and they will buy them up. Meaning, those municipalities which find themselves in financial trouble will have the ability to borrow at these all-time low rates and have a ready buyer with cash. There's going to be a mass rush to retire all high-yield outstanding muni debt and refinance for a pittance. There are ways for muni investors to take advantage of this situation immediately with just a little effort and research.

Now, as I see it, the big problem for muni investors, both muni bond investors and muni bond fund investors, is that once this gargantuan refinance takes place, coupons on muni bonds will be left at these low yields. There is no incentive to be taking yields of no more than 2% in the muni market (in my view) - the risk is too high at that point. Not only for the fact that there is always going to be some risk of default (they are bonds after all), but then you have the interest rate risk on top of it. Any increase in market rates will cause bond prices and bond fund NAVs to crater.

The Fed has already said no negative rates. So, to view munis as good investments going forward after the big refinance completes, you either have to believe that rates will stay at historical lows for years to come, and/or the Fed changes its stance and does take interest rates negative. However, as a result of flooding the market with money, clearly the risk of inflation needs to be considered. If we see inflation begin to rise above the 2% (or slightly higher) target, to fight it, there will be a need to raise interest rates...or watch as the prices of goods and services really get out of hand.

Interesting times, indeed!

jazz4cash 05-24-2020 08:19 PM

Iím on a learning curve to evaluate muni bond risk but I have fairly limited allocation of 4% spread over 4 issues. Thatís my risk mitigation for now. Iíd be comfortable with 8-10% without more analytical capability I think. I donít have any other bonds.
My single state muni fund dropped 7% immediately after I bought in. I spent two yrs reinvesting the monthly distributions as it slowly climbed back and finally recovered just before the pandemic. Now it is underwater again including all reinvested dividends but my individual bonds have recovered nicely. Lesson learned is to not reinvest the dividends. The distribution yield is ~2%+ and Iíd be very happy to have retained them for another purchase.

njhowie 05-25-2020 09:49 AM

Quote:

Originally Posted by jazz4cash (Post 2434361)
I’m on a learning curve to evaluate muni bond risk but I have fairly limited allocation of 4% spread over 4 issues. That’s my risk mitigation for now. I’d be comfortable with 8-10% without more analytical capability I think. I don’t have any other bonds.
My single state muni fund dropped 7% immediately after I bought in. I spent two yrs reinvesting the monthly distributions as it slowly climbed back and finally recovered just before the pandemic. Now it is underwater again including all reinvested dividends but my individual bonds have recovered nicely. Lesson learned is to not reinvest the dividends. The distribution yield is ~2%+ and I’d be very happy to have retained them for another purchase.

Based on our discussions on the other thread, you are coming along, and will be an expert in time.

At the end of the day, I firmly believe that in general the muni market is "safe". By sticking to a few simple rules, even without doing rigorous research, the average investor will not be able to get himself/herself into trouble. The Moodys report confirms that for the past 50 years. Stick to a portfolio of investment grade munis and just blindly picking bonds you have less than a 1 in 1000 chance of picking one which defaults. Do some additional research, or stick to upper investment grade and you bring that probability even lower.

I believe that many investors who could do very well with owning individual muni bonds as opposed to funds avoid it simply because it is not a common/prevalent place for individual investors to be found, there is a general lack of understanding, and most will not take the time to learn. I personally like this aspect - as you've seen, it produces mispricing and inefficiency which allows finding quality bargains.

My muni bond portfolio maturity curve looks like the right half of a bell curve. Bulked up in the early years and trailing off, with maybe 10% to 15% maturing after 10 years. It's performed solidly the past few years with no stress and not one month where the portfolio value has gone down. When the equity markets head lower and get volatile, the bond prices head higher. I saw (relatively) dramatic jumps in December 2018, as well as the first few months of this year. As my maturities/redemptions roll in along with interest payments, I look to redeploy picking up additional bonds keeping the maturity curve basically the same. It's been getting difficult finding bonds to reinvest in lately as there is a lack of availability and most of what is offered is at yields below what I will accept. Maybe this has something to do with Fed operations the past few weeks, or less desire of folks to sell? Whatever - this is the first time in a long while that I have not been fully invested, being unable to find enough bonds to put money in to and beginning to have a cash balance build. As a result of maturities and calls taking place of both CDs and munis I hold, a full 30% of my entire portfolio is coming back to me in cash between now and year end.

COcheesehead 05-25-2020 11:51 AM

Based on comments here and on other financial forums I frequent, one of the more misunderstood asset classes is bonds. If you have the expertise to look under the hood and make a good judgement on what is considered a good muni bond at a decent price, you are a very unique individual. I think we should issue our own t shirts or something to honor us bond geeks.

nwsteve 05-25-2020 12:03 PM

When exploring how to begin our muni investing, I found this article on Fidelity quite helpful. You do not have to have an account at Fido to see.
https://www.fidelity.com/learning-ce...al-bond-market

jazz4cash 05-27-2020 05:55 AM

Fidelity has many good archived webinars in their Learning Center. Here is a 60 minute overview titled "Considerations For Muni Bond Investing"
https://www.fidelity.com/learning-ce...rket-recording

If you do not have a Fidelity account, you can sign up for a guest account
https://guest.fidelity.com/GA/profile


Edit: The 60 minute webinar in the Learning Center link was too long for me, but you can also download the presentation slides which are quicker to review.

brewer12345 05-28-2020 07:01 PM

Somewhere in my bookshelf is the standard textbook on munis. If there is interest I will find it and list the title and author. It is basically an MBA level textbook on the asset class and I think still the standard reference.

njhowie 05-28-2020 10:35 PM

Quote:

Originally Posted by brewer12345 (Post 2436092)
Somewhere in my bookshelf is the standard textbook on munis. If there is interest I will find it and list the title and author. It is basically an MBA level textbook on the asset class and I think still the standard reference.

:laugh: I have an entire shelf of the bookshelf with muni titles if anyone is interested. :laugh:

I went on a buying spree when I was coming up to speed. Probably went overboard when I really began to get into it.

jazz4cash 05-29-2020 05:40 AM

I was surprised to see the breakdown of muni bond ownership in the Fido presentation I linked earlier. Retail Household ownership is 48% followed by Mutual Funds (26%) and then banks (12%). I wouldíve expected higher percentages for financial institutions but perhaps the tax free status is no benefit for them.

brewer12345 05-29-2020 06:13 AM

Quote:

Originally Posted by jazz4cash (Post 2436151)
I was surprised to see the breakdown of muni bond ownership in the Fido presentation I linked earlier. Retail Household ownership is 48% followed by Mutual Funds (26%) and then banks (12%). I wouldíve expected higher percentages for financial institutions but perhaps the tax free status is no benefit for them.

The marginal tax rate for high income individuals is far higher than for a c corp like a bank. In addition, munis are harder to pledge as collateral, which is a major issue for banks.

COcheesehead 05-31-2020 01:40 PM

1 Attachment(s)
Interesting chart that may help you with future muni bond research.
Itís from the WSJ.

jazz4cash 06-09-2020 09:10 PM

Quote:

Originally Posted by jazz4cash (Post 2434361)
Iím on a learning curve to evaluate muni bond risk but I have fairly limited allocation of 4% spread over 4 issues. Thatís my risk mitigation for now. Iíd be comfortable with 8-10% without more analytical capability I think. I donít have any other bonds.
My single state muni fund dropped 7% immediately after I bought in. I spent two yrs reinvesting the monthly distributions as it slowly climbed back and finally recovered just before the pandemic. Now it is underwater again including all reinvested dividends but my individual bonds have recovered nicely. Lesson learned is to not reinvest the dividends. The distribution yield is ~2%+ and Iíd be very happy to have retained them for another purchase.

The trend continues...........
My individual munis have all rebounded and are now priced 2-11% above my purchase price. I bought 3 bonds in April and they've all kicked out a dividend too! My single state muni fund remains under water.

njhowie 06-10-2020 12:43 AM

Quote:

Originally Posted by jazz4cash (Post 2440879)
The trend continues...........
My individual munis have all rebounded and are now priced 2-11% above my purchase price. I bought 3 bonds in April and they've all kicked out a dividend too! My single state muni fund remains under water.

Indeed! I had an email discussion with another member about this just a day ago who was asking me about safe havens in individual munis at this time. My reply was that the market was currently particularly abnormal. Last week, the 10-year treasury moved up 40%, from 0.65% at the beginning of the week to 0.9% on Friday. Logic would indicate bond prices should have fallen somewhat and yields picked up a bit. That did not happen - individual bonds went up in price and yields held steady and fell slightly. I anticipated the value of my portfolio to tick lower, instead it went higher. I am reasonably certain this is happening because of the Fed and their (stated) bond buying operations. Whether they have actually begun purchasing munis, or just the knowledge that they will has prompted market participants to begin scooping them up, something is dislocating activity in the market at this time.

I was attempting to purchase more/new bonds for my portfolio to replace maturing and called CDs and bonds, and I was running in to a lot of resistance. Bond dealers were not budging on price, and I was not willing to give in and potentially get stuck with a low-yielding bond for an extended period. Just the same, I sold one of my water bonds because the price was pushed higher quickly - purchased 4/1 for 114.35, sold 5/29 at 128.888 and it has sinking fund redemptions beginning in 5 years with yield below 0.7% to the first sink date. Give me the guaranteed profit today - do I want to sit around and possibly only get 0.7% over 5 years? Umm - no! This was one of those types of situations we discussed on the other thread where it made sense to sell. Here, there was a dealer trying to sell the same bond at 129.xx, so I was able to post my ask below his and after a few days I snagged a buyer. I suggest you consider similar for those you have which are showing an appreciation in value. Request bids on all the bonds and see what comes back. Plug those prices in to the price/yield calculator and see what your effective yield is to maturity/call and decide if it is worth holding or capturing the capital gains now. If you search for the bonds and see that someone is currently offering them for sale, then you can do as I did, go through the screen to sell at a price just below what the best offer is - this is the route you'd go if the bonds are being offered and the bid comes back too low.

https://gpi.fidelity.com/ftgw/interfaces/pyc/


I do have another problem lurking around the corner - 12% of my portfolio is maturing or being called between now and July 1, almost 25% already confirmed between now and year end, and this does not even account for up to another 10% which has a reasonable chance of being called. So I am going to be pressed to find reinvestment alternatives. At this time, I am just fine if I need to sit in cash earning nothing waiting for yields to pick up or for the stock market to crash again. I refuse to be pushed around and deviate from my plan/approach by this market.

COcheesehead 06-10-2020 08:27 AM

Quote:

Originally Posted by jazz4cash (Post 2440879)
The trend continues...........
My individual munis have all rebounded and are now priced 2-11% above my purchase price. I bought 3 bonds in April and they've all kicked out a dividend too! My single state muni fund remains under water.

Technically bonds pay interest, not a dividend. :coolsmiley:

The deals in bonds now aren't what they were 2 months ago, but I still have found a couple that I bought recently.

I have for the most part now 7-8 years of my retirement budget prefunded with munis. I still participate in the equity market so I haven't been left behind there either.

jazz4cash 06-10-2020 01:07 PM

Ok thanks for the correction! I do desire to be technically accurate. My buys are so tiny I feel like a gleaner picking up good produce in the fields after the big combines have passed by. The thing is itís hard to accept todayís deals which are so inferior to what was out there a month ago or year ago. Same with CDs. Already dreading the slug of 5% Penfed certs that mature in 6 mos. a bit can go to NFCU add-ons but not all. Iím working on being patient like Howie says to sit in cash until the right deal comes along. Iím not comfortable with taking a cap gain right now but Iím learning to expand my comfort zone.

brewer12345 06-10-2020 02:40 PM

Returns in munis are awful at the moment. Id go out 5 or more years if there were any yield, but there isn't. I have been buying out to 3 months or so catching retail odd lot holders that just want to liquidate, but even that has dried up. As my existing stuff matures I guess I will be adding to my navy add on CDs.


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