Muni Bond (and Muni Bond Fund) Discussion

[COcheesehead]

Quote:

Originally Posted by phil1ben What are peoples views on individual agency debt as opposed to treasuries. Talking about FHLB or FFCB. If I buy a 5 year (callable every three months) Agency bond I normally can get 60-80bps more than a 3-6 month zero coupon treasury. I realize that the agency bond is taxable state and the treasury is not but I am in a relatively low tax state. Any reason not to take the better yield of the agency bond?

Higher coupon agency bonds are very likely to be called, so as long as you understand that. I buy them for superior short term returns, but every one I’ve owned with a 6%+ coupon that has reached its call window has been called.
There are secondary market issues selling below par that may provide a combination of coupon and increased principal at maturity that are less likely to be called because their coupon is below current rates. I own some of those as well.

[jazz4cash]

Quote:

Originally Posted by phil1ben What are peoples views on individual agency debt as opposed to treasuries. Talking about FHLB or FFCB. If I buy a 5 year (callable every three months) Agency bond I normally can get 60-80bps more than a 3-6 month zero coupon treasury. I realize that the agency bond is taxable state and the treasury is not but I am in a relatively low tax state. Any reason not to take the better yield of the agency bond?

This thread is more focused on munis. There are many posts about agency bonds in the Treasury Bill, Notes, and Bonds thread.

[njhowie]

So, here is a new one...

Just received a call from Fidelity bond desk. Went to voicemail since I happened to be taking care of some "business". The ambiguous message is about a bond trade on 6/5. Says to call by 3PM so they can resolve otherwise the trade may be canceled. I check, only bought one bond on Monday. So I'm expecting that they're going to give me the standard line that the dealer messed up and they have to cancel the trade.

So I call back, and the rep says that the dealer is actually short and they don't have the bond. So again, I expect he's going to say they have to cancel it. But he says the dealer is offering to cover and buy it back and they would wave the commission on the trade. The price dealer is willing to buy back at is about 1 point higher than what I paid. Works for me. Go ahead. Just waiting to see it post and what my profit is.

Update: Transaction just posted. $49.50 profit for 4 days.

[njhowie]

Well, they adjusted again...additionally giving me $5 credit for the original trade commission...so add $5 to profit...$54.50.

So, to summarize, I collected:
0.1 from dealer = $50
$4.50 interest

The interesting part as I'm thinking about it - the $4.50 interest. I never really owned the bonds. Dealer didn't have them. So I guess, as part of covering his short position on my bonds, the dealer had to cough up the interest as well. This was essentially a naked short on the part of the dealer. Even more surprised that they didn't simply cancel the trade as they normally do.

[jazz4cash]

Interesting. Thanks for posting something I never imagined could happen. I wonder how short they were and how you were picked to get bought out. How many bonds were listed as being available when you placed your order?

[njhowie]

Quote:

Originally Posted by jazz4cash Interesting. Thanks for posting something I never imagined could happen. I wonder how short they were and how you were picked to get bought out. How many bonds were listed as being available when you placed your order?

It was just the 5 bonds.

The dealer wasn't looking to be short, it just happened because he posted a bond for sale which he didn't have in his inventory available for sale - it was apparently a mistake. After I bought it, and he didn't have it, then he was short. It wasn't a matter of me being picked - the trade shouldn't have happened - if I didn't get back in touch with Fidelity, or agree to take the dealer's offer to buy them back, then they would have canceled the trade. Again, not really sure why the dealer was being generous in buying them back from me instead of just telling Fidelity to cancel it as normally happens.

[njhowie]

Just received another bond call for August 1. That gives me 3. Coincidentally, all of these calls are for zero coupons. Original maturity dates were August 1 2027, 2034, and 2037.

I'm good with these calls as my YTM on all of them is much lower than what I can easily get in the market right now.

[COcheesehead]

I haven’t had a muni called in a long time.

[Mr._Graybeard]

Interesting, zeroes being called, especially with maturities in the 2030s. It seems counterintuitive for the borrower. I wonder what events might have triggered those decisions, like conclusion of a capital project or improved credit rating. Likely the motivation is different in each case.

[njhowie]

Quote:

Originally Posted by Mr._Graybeard Interesting, zeroes being called, especially with maturities in the 2030s. It seems counterintuitive for the borrower. I wonder what events might have triggered those decisions, like conclusion of a capital project or improved credit rating. Likely the motivation is different in each case.

My thoughts exactly.

I have a ton of Forney, TX insured zeroes with maturities out to 2053 and they have annual call dates on Aug 15. Almost all are YTM over 6% with a few over 7%. Last year a couple of them called on their first call date. Haven't heard anything on the ones that can call this year, but hoping they don't call. The final set of bonds can call beginning Aug 15 next year. Forney's credit rating was upgraded a couple years ago (Amazon moved in and brought economic stimulus) - these were all issued 2012-2014, so the first call dates are 10 years after issuance. We'll see if I get notice in the next few weeks.

[REWahoo]

Quote:

Originally Posted by njhowie I have a ton of Forney, TX insured zeroes...

I once dated a girl from Forney named Kate.

[MichaelB]

Quote:

Originally Posted by REWahoo I once dated a girl from Forney named Kate.

Great first line for a limerick

[njhowie]

Trying to get a little duration. If I can't get duration, I'm just taking secondary market CDs. Picked up a couple agency bonds out of curiosity over past few days. 10-year treasury broke through 4.0% today, so things should get interesting.

Picked up 5-year callable CD this morning for YTM of 5.46%, but coupon is 5.0%, so it shouldn't be called as soon as those new issues with coupon at the current ~5.4%.

Not feeling too much love with what's available for the munis...put some bids in over the past few days, but dealers aren't budging. That will likely/hopefully change with this 4.0% on the 10-year.

[COcheesehead]

Haven’t done much in munis other than just staying with my ladder strategy in my taxable account. In deferred accounts I have been having some fun flipping lower investment grade corporates for a few hundred bucks here and there.

[njhowie]

Finally found a muni dealer willing to play ball.

Bought more Forney insured zeros - 8/15/2043 maturity, callable 8/15/2024 YTM 7.39% YTC 6.69%. I'll take those yields if they want to call or not.

[53anddone]

I must admit I had never tried offering less than the ask on individual bonds (maybe I'm an idiot) but managed to actually get one hit today on a very short term (12/23) issue. I was delighted!

I still think the bond market needs to catch up to the treasuries - all my calculators show them to be not as attractive as a T Bill - at least for 3 years or less. Then again my state (VT) is more thinly traded and rates don't seem to be as attractive as other states.

[nelsonowe]

Anybody buying long new-issue housing bonds?

Currently, IL and CT new issues are available now. Yields at 4.5-4.75% are as good or better than anything in the secondary market for the equivalent credit and duration. If you live in a state with an income tax (I do - CT) and can get one from your state the return is that much better (assuming you have other taxable income and are buying in a taxable account, of course!)

First dated calls on these are nine years out - 2032. However, the Fidelity bond desk tells me housing bonds are often redeemed even earlier if mortgages are paid off sooner than expected (average around 7 years). Still, it seems like you are getting paid a decent premium for not knowing exactly when you'll get paid back.

Any thoughts pro or con?

[njhowie]

Quote:

Originally Posted by nelsonowe Anybody buying long new-issue housing bonds? Currently, IL and CT new issues are available now. Yields at 4.5-4.75% are as good or better than anything in the secondary market for the equivalent credit and duration. If you live in a state with an income tax (I do - CT) and can get one from your state the return is that much better (assuming you have other taxable income and are buying in a taxable account, of course!) First dated calls on these are nine years out - 2032. However, the Fidelity bond desk tells me housing bonds are often redeemed even earlier if mortgages are paid off sooner than expected (average around 7 years). Still, it seems like you are getting paid a decent premium for not knowing exactly when you'll get paid back. Any thoughts pro or con?

The Fidelity bond desk gave you good information - it's why I've generally stayed away from housing bonds. Unlike other munis where you have call dates that are well known at time of issue, housing bonds can generally be called at any time the issuer likes. When we had interest rates falling for so long, this was a big problem - because most were trading at a premium to par. If the issuer popped up one day and decided to call, that would cause an immediate loss to all the bondholders who paid above 100/bond.

So, a general rule of thumb when purchasing housing bonds - pay 100 or less. If you do pay above 100, mentally accept the fact that the bonds could be called tomorrow and you may suffer a loss as a result.

[nelsonowe]

True. I have only bought at par (new issue) or modestly below. These days, I don't see much in the muni world priced above par. The bigger problem is deep discount/low coupon which results a a big portion of the yield being taxable.

[nelsonowe]

And taxable at ordinary income rates due to the de minimus rule.