Bond Dividend Allocation

[njhowie]

Actually, individual investors play a big part in the municipal bond market. This report from the Municipal Securities Rulemaking Board combines individual investors and nonprofits as a single category, but as of 2018 the two groups held more muni debt than mutual funds, banks, ETFs and brokers combined. http://www.msrb.org/msrb1/pdfs/MSRB-Brief-Trends-Bond-Ownership.pdf

So, the little guys have a chance in the muni market, perhaps, because they are the muni market.

That is interesting as far as ownership, however, it is certainly not what is taking place in the muni market day to day as far as trading. Anyone who reviews the trading and what is taking place can see that. Individuals may own a significant portion of municipal bonds outstanding, however, they are not purchasing them on their own and it is not the "small guy".

With most all brokers, the minimum municipal bond purchase permitted is 5 bonds, $5000. How many "small guy" individuals/households do you suppose are doing $5000 (minimum) worth of municipal bonds per purchase/sale on their own behalf? It's not the small guy at a discount broker getting commission free equity trades. It's also not the retiree you see participating on E-R.org having some portion of their AA in fixed income (most loathe even holding individual bonds, of any type). It's a tiny sliver of all individual investors.

One unique characteristic of the muni market is a comparatively small average trade size, in the order of $100,000-$200,000.

https://www.marketsmedia.com/muni-bond-trading-evolves

Do you think the small guy is in there making that "comparatively small" average $100,000-$200,000 muni purchase/sale? Of course not.

Lastly, as far as ownership, this report below, from SIFMA, which is a little more recent than the one you've provided from MSRB, indicates that individual/household ownership of municipal bonds is now below 50% of the total. See page 14 for US Municipal Holders at 45.7% of the total as of 2019 Q4. This may be indicative of a shift, as interest rates cratered through 2019. However, again, ownership does not reflect how buying/selling in the muni market takes place day to day.

https://www.sifma.org/wp-content/up...Quarterly-Fixed-Income-2020-03-27-SIFMA-1.pdf

 

[jazz4cash]

Bonds upon maturity always return to par. So below par purchases are the locked it, guaranteed return. Interest payments just add to the return.

Think of it as buying a stock at $90, that is more or less guaranteed to return to $100 plus dividends.

Actually, there's a bit more to it than the additional yield that you earn by purchasing below par. The discount to par has to be reported as income when the bond matures. If the discount exceeds the De Minimis threshold, the gain is reported as ordinary income. In not, it is reported as capital gain.....it's maybe not too significant at my level of purchases but I am still learning and evaluating.

 

[COcheesehead]

Actually, there's a bit more to it than the additional yield that you earn by purchasing below par. The discount to par has to be reported as income when the bond matures. If the discount exceeds the De Minimis threshold, the gain is reported as ordinary income. In not, it is reported as capital gain.....it's maybe not too significant at my level of purchases but I am still learning and evaluating.

I didn’t want to get into the weeds with taxes, but what you is true.

 

[jazz4cash]

Still looking at muni options. I’m very surprised at the range of bonds available. I was aware of GO and revenue bonds for public projects, infrastructure, medical and educational facilities.

I am surprised to see a few offerings for private secondary education and private mid to upscale housing (including seniors I guess).

These have me considering buying as much as 10 % above par. Is that a bad idea? It’s 3.3% YTW 7yrs or 3.9% YTM 12 yrs and rated single A. Going to do a drive by of the apartment complex today.

 

[njhowie]

I am surprised to see a few offerings for private secondary education and private mid to upscale housing (including seniors I guess).

I'd suggest staying away from munis which are actually private companies/ventures funding their projects with public money in this way. Senior housing is an example where it is very easy for the investor to lose. Hospitals are another where I caution others to just stay away. Look for who/what is providing the security backing the bonds. If you're only entitled to the revenues generated by the project, you have to ask "Can the revenue stream stop, or could it potentially be impacted to the point where it will not be enough to cover the interest payments and redemption", "Could it go bankrupt"? If we're talking about a utility system, like water, electric, or sewage, and you have revenue bonds for it, those are good revenue bonds - it's stipulated that rates will be set appropriately to provide some specified debt coverage ratio. In a housing project, it's possible that it fails and the revenue stream is not sufficient to cover the bond interest/payoff.

You need to thoroughly read the official statement (prospectus) in these cases, specifically reading the Security section with a fine-tooth comb, because most are sketchy. Even some of the real munis that are revenue-based can have gotchas in them if you don't ask "What if"? Recently an issue from University of Oklahoma provides a good example, where investors are going to lose. OU is certainly not in any financial difficulty. However, the (housing) project tied to this particular issue did not perform as expected, it isn't generating the revenue anticipated to pay the bonds, they're essentially shutting down the entire project and so they aren't going to pay. The terms and security are very clearly stated in the official statement, and the University is not responsible and doesn't have to pay in the situation which arose. Investors are raising a stink about it, but the terms are so clear that you have to wonder if any of them read it before buying.

For those having high yield, it's best to go to the audited annual financial statements and check what the financial position and condition of the issuer is. If the issuer is not strong, or the local economy is deteriorating, and the trend doesn't look good, I will generally pass.

Anyhow, as is generally the case, try not to chase yield. There's very likely a good reason why the yield is what it is.

Public school education-related bonds are generally much better as they are most often general obligation (GO) and the municipality puts up its full faith and credit, specifically stating that they will use their unlimited taxing ability to make good on the bonds as necessary.

 

[jazz4cash]

Thanks for the detailed response.

 

[njhowie]

No problem - happy to share.

Here is the story on the OU bonds that went South:
https://www.barrons.com/articles/un...ith-bill-for-troubled-development-51568115000

https://www.bloomberg.com/news/arti...homa-sued-over-struggling-luxury-dorm-project

And here is the link to the official statement:
http://www.mcelweequinn.com/system/...ntfinanceauthority_pos.pdf?mod=article_inline

This is right on the cover page:

THE SERIES 2017 BONDS ARE A SPECIAL, LIMITED OBLIGATION OF THE AUTHORITY, PAYABLE SOLELY OUT OF THE REVENUES OR OTHER RECEIPTS, FUNDS OR MONEYS PLEDGED UNDER THE INDENTURE AND FROM ANY AMOUNTS OTHERWISE AVAILABLE UNDER THE INDENTURE FOR THE PAYMENT OF THE SERIES 2017 BONDS. THE SERIES 2017 BONDS DO NOT NOW AND SHALL NEVER CONSTITUTE A CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY. THE AUTHORITY HAS NO TAXING POWER.

THE UNIVERSITY IS NOT OBLIGATED TO PAY THE PRINCIPAL, REDEMPTION PRICE, IF ANY, OR PREMIUM, IF ANY, OF, OR INTEREST ON THE SERIES 2017 BONDS, AND THE SERIES 2017 BONDS ARE NOT A DEBT, LIABILITY OR OBLIGATION OF THE UNIVERSITY.

Jump to Page 16 for all the details in the SECURITY FOR THE SERIES 2017 BONDS section.

 

[jazz4cash]

Great stuff, very helpful. Thanks for the links. I can barely decipher the official docs for the bond I’m looking at. I drove by the development (20 min away) and i still may invest. These don’t seem to trade much. It’s only a tiny bit available and will likely be gone by the time my due diligence is complete. The security behind these looks shallow like the OU issue but the difference is the demand for housing around here.

 

[COcheesehead]

Great stuff, very helpful. Thanks for the links. I can barely decipher the official docs for the bond I’m looking at. I drove by the development (20 min away) and i still may invest. These don’t seem to trade much. It’s only a tiny bit available and will likely be gone by the time my due diligence is complete. The security behind these looks shallow like the OU issue but the difference is the demand for housing around here.

Most, if not all, muni bonds don’t trade much. Overall, it’s a relatively illiquid market. FYI. That is what lead to the huge spreads we saw a month ago. I am sure NJHowie picked up some bargains then, I did.
Buy assuming you will hold until maturity.

 

[jazz4cash]

I know munis do not trade much but what meant was these specific bonds only have 1 trade in 12 months for a total of 15k. That’s less than I usually see and not too helpful with price history.

 

[COcheesehead]

I know munis do not trade much but what meant was these specific bonds only have 1 trade in 12 months for a total of 15k. That’s less than I usually see and not too helpful with price history.

Hence my point about being illiquid which leads to big spreads.

 

[njhowie]

I know munis do not trade much but what meant was these specific bonds only have 1 trade in 12 months for a total of 15k. That’s less than I usually see and not too helpful with price history.

What does Fidelity indicate for 3rd Party Price relative to what the ask is?

The 3rd Party Price is not always correct, but it does serve as somewhat of a check that you are not getting fleeced. All else being equal, try to purchase below that third party price. In the current environment, where liquidity is tighter than usual, that may be very difficult. However, it still serves as a reminder not to overpay for something which may carry more risk and not provide sufficient yield/return for that risk.

I just purchased an issue at 97.5 where the 3rd Party Price was 104.79. Minimally, I'll feel good seeing it with a nice profit in my portfolio nightly. If you purchase above that 3rd Party Price, you're going to immediately be seeing it valued with a loss in your portfolio.

 

[jazz4cash]

The Fidelity 3rd party price is 119.492
The Ask is 109.953. I think this has come down slightly.
Looking at trade activity on Emma, I see a customer sold a lot of the exact same size 2 weeks ago for 108.7.
I was going to offer 109.3 (e.g. halfway between the sell and ask).

 

[njhowie]

The Fidelity 3rd party price is 119.492
The Ask is 109.953. I think this has come down slightly.
Looking at trade activity on Emma, I see a customer sold a lot of the exact same size 2 weeks ago for 108.7.
I was going to offer 109.3 (e.g. halfway between the sell and ask).

Sounds good.

I can see that bond. A markup of 1.25 from the prior sale is not bad at all even if you just paid it. I routinely see them marking up anywhere from 2 to 6 points - attempting to rob the buyer. Pull up CUSIP 59447PDA6 which is currently out there. Last sale was two weeks ago at 125.649, another dealer took it at 126.599 and he's got it currently posted with an ask of 131.779 - good for him if he can get it, pity the fool who pays it - and that's not even a bond someone should want to hold considering the sinking fund redemptions starting in 2023 (giving the yield to sink shown of negative 0.559).

After you submit your order, hopefully he'll give you the fill immediately since he's been sitting with it for a good while. If he doesn't, keep an eye on it, watching it from the search screen. Within a couple minutes you should see your bid pop up along with the ask on the other side. He may lower his ask a little, and then you can decide to stand pat, or play the game and move your bid up a little or take his modified ask. It sounds like you'll be in a good position since nobody else is offering to take it from him. But again, even if you paid his ask, it's a good deal if he won't budge.

Good luck!

 

[jazz4cash]

I don’t have the cash to make the bid without selling something or transferring funds from outside Fido. I’ll need to call them up and have them explain my options. I could sell my muni fund but I don’t know when those funds would be available. Maybe buy on margin until the fund sale settles. I’m more curious and less anxious at this point.

Before you asked I assumed the 3rd party price was related to the trade history price. Now I seem to recall 3rd party price is used to price my other bonds on a daily basis.

 

[njhowie]

I don’t have the cash to make the bid without selling something or transferring funds from outside Fido. I’ll need to call them up and have them explain my options. I could sell my muni fund but I don’t know when those funds would be available. Maybe buy on margin until the fund sale settles. I’m more curious and less anxious at this point.

If you're transferring cash in through an external link already set up, or you make a stock/ETF sale all that money is immediately available to purchase a CD/bond/muni - they don't make you wait until settlement, the funds are immediately available. I've done this many, many times. For a mutual fund sale, you'll likely need to wait until the next day, since the sale would occur after market close.

 

[jazz4cash]

I transferred some cash but not enough to cover the dividend.
I transferred some more and it went through (instantly) at 109.3.

 

[njhowie]

Congrats!

Welcome to the club.

 

[COcheesehead]

Yes welcome to the bond geeks’ den.

 

[jazz4cash]

Thanks. I feel right at home!

 

[njhowie]

Buying any others? Looking? I am still finding good yield/pricing on small lots. Been buying more as my CDs are maturing and being called - I have a bunch of calls coming the next few weeks.

This morning I picked up another of the NYC MTA (taxable) munis ... maturity Nov 2030 YTM=7.05%, callable Nov 2020 YTC=5.98%. Doubtful they will be in a position to call in 6 months, but if they do, I can still live with the yield.

 

[jazz4cash]

I’m looking, watching. No cash. I saw where those NYC munis are priced lower than what I paid. Your timing is good! I’m rather intrigued by these housing authority bonds but I also found some GOs that look interesting. I’ll probably swap my muni fund for some of these. That fund has been a disappointment. It would’ve worked out better for me if I hadn’t reinvested. Learned my lesson. I have a slug of CDs maturing next Jan.

Edit: just noticed you said taxable. That’s not on my radar right now.

 

[njhowie]

Edit: just noticed you said taxable. That’s not on my radar right now.

Yes - within my IRA. I periodically pick up a tax free muni here and there for our taxable accounts, but generally find that even after the tax benefit of tax-free munis, I can get better yields/quality with taxables.

 

[jazz4cash]

Yes - within my IRA. I periodically pick up a tax free muni here and there for our taxable accounts, but generally find that even after the tax benefit of tax-free munis, I can get better yields/quality with taxables.

Hmm....something new for me to look into. I thought they were mostly quasi-public purpose like stadiums and the like.

 

[njhowie]

Hmm....something new for me to look into. I thought they were mostly quasi-public purpose like stadiums and the like.

No - plenty of tax free issues also have taxable components to them.

Most all of my taxables are a component of an issue with a tax free side to them as well - water/sewer, universities, generic general purpose/general obligation.