Muni Bond (and Muni Bond Fund) Discussion

[njhowie]

I got the dealer to accept an under bid on a 4% muni today. First time I can ever remember that happening. Probably a bad sign. LOL

Great job! I likewise got one today as well.

Still 15 minutes...I'm still bidding.

 

[sengsational]

Historical Muni Defaults

It looks like Puerto Rico was not a good idea in the past decade. And schools seem to be a bit of a problem. But if you were buying shorter duration, getting something that starts with an "A" and only has a year left will almost certainly not default, if history is any guide.

 

[Family]

Building Muni Bond ladder from scratch

I'd like to build a muni ladder in my taxable account to reach my final income needs (FIRED Nov 2021 @ 59). Currently living on pension + rental income, but need additional cash flow.

Question 1: COCheeseHead mentioned to search munis on "Escrowed to Maturity" and "Pre-refunded". However, when I search on both (Schwab), no hits. When I search on one or the other, there are a few to choose from. Which is better or is both recommended?

Question 2: What do you look for in a GO muni? I live in OH, but am thinking WA, FL, & TX (in addition to some in OH). My Ohio tax is just 4%, so not too high.

Question 3: Did munis go "on sale" last June during the bond fund selloff, or just corporates? ie should I hope for some good muni sales as interest rates rise?

Question 4: Since short term interest rates don't have much impact on long term (10 yrs +), should I go ahead and purchase the best I can get now, before potential economy problems?

Thank you for your thoughts!

 

[njhowie]

1. Most times they are the same. Minor technicalities in any differences. Generally, the pre-refunded (aka "advanced refunding") are done at the call date, whereas the escrowed to maturity is exactly that - escrow account set up with bank, remaining principal and interest are deposited, trustee manages the disbursements...through maturity. The latter is generally done if the issue does not have a call option built in for the issuer.

2. For GO munis, you want to go to EMMA and open up the most recent certified audited financial results (CAFR). Skim through it and find the Net Position Statement (Balance Sheet). Look at the bottom line that says net position. If you see a negative or big negative number there, to make things simple, you probably just want to avoid purchasing that muni. If the net position is positive, then go to the Revenue Statement (Income Statement), go to the bottom lines and see how the fund balance has changed over the past few years. Are they drawing down year after year, or do the have positive cash flow and have increasing fund balance. Obviously we know which is better. If they are burning through cash year after year, and they have no plan or foreseeable catalyst to reverse the trend, then again, avoid.

3. Munis go on sale when rates go up. Nothing like now, but they do have their periods of volatility.

4. Since we don't know what will happen going forward, I always just buy what I'd be happy with under the current circumstances. Rates could continue higher, or the Fed could pause and then folks race to gobble up bonds sensing the next move will be lower rates. Don't overload on medium or long term issues and then you won't have to be worried about being stuck with low yielders (relative to where rates are at the moment). Nothing wrong with having medium and long term issues in your ladder, just don't overload on them...no matter how good the yields appear to be.

 

[COcheesehead]

Njhowie is the muni king. He has good advice.
As to number 4, ladder them and stay true to the strategy. Always good to have some at every point on the curve for a hedge.

Good luck.

Muni and individual bonds in general have served me well.

 

[Mr._Graybeard]

I just got my first call announcement in quite awhile. DFW Airport, CUSIP 235036H45, 5% coupon, 2039 maturity. Call date is 11/01.

 

[jazz4cash]

I just got my first call announcement in quite awhile. DFW Airport, CUSIP 235036H45, 5% coupon, 2039 maturity. Call date is 11/01.

Were you surprised? Seems a bit odd to me with rates going up etc. Any more details like redemption terms? Just trying to learn. It seems my munis are being derated.

 

[COcheesehead]

Were you surprised? Seems a bit odd to me with rates going up etc. Any more details like redemption terms? Just trying to learn. It seems my munis are being derated.

Regarding ratings: not all bonds have both a Moody’s and an S&P. If they have neither, they may be getting close to maturity or there may be defeasance.

 

[njhowie]

Were you surprised? Seems a bit odd to me with rates going up etc. Any more details like redemption terms? Just trying to learn. It seems my munis are being derated.

I think Fidelity was a little slow on giving him notice. If you check on EMMA, they filed the document a month ago. They had been working on the deal for additional funding the past few months in anticipation rates would be headed higher, and they still had the ability to issue new bonds at a lower coupon.

Filed August 22:
https://emma.msrb.org/P21607065-P21239021-P21662753.pdf

Filed May 5:
https://emma.msrb.org/P11595540-P11231084-P11653325.pdf

 

[Mr._Graybeard]

Were you surprised? Seems a bit odd to me with rates going up etc. Any more details like redemption terms? Just trying to learn. It seems my munis are being derated.

I have other 5% coupon bonds that are past their call date, so yeah, I hadn't expected it. Redemption terms are pretty simple, 100% redemption at face value on Nov. 1.

Certainly the mark-to-market rated value of my bonds has fallen. I don't think the S&P, Moody's and Fitch ratings have -- in fact, a good number of those ratings are up, or at least their outlook has improved. COVID in the rear-view mirror has a lot to do with that.

 

[Mr._Graybeard]

I picked up a small bond today from the Texas Transportation Commission, Central Texas Turnpike System revenue bonds. 5% coupon, maturity 8/2029 with the call at 8/2024. 101.8% of face, I paid a little over 102 with markup. CUSIP 88283KAS7.

 

[npage]

Any predictions on home much lower muni bond funds will go? They are adjusting quickly. Thankfully due to knowledge gained here we got most out before it all went to heck but old habits still die hard and kept a bit in there and currently sitting on a chunk that is down 5.5%. Specifically VWAHX at a cost basis of 10.72, currently at 10.12. Tax bracket is 25% so taxable yield for me is about 4.1% roughly what CD's and treasuries are at now.

Cut my losses or ride it out. Do not need the money in next 5 years and overall maybe 15% of total portfolio. My gut says sit on this chunk and wait for rates to go other way eventually. Then my gut says, get out and reinvest in treasury ladder and be done. In other words, flip a coin?

I think we have at least another 100bp in rate increases over next 12 months so where this stops I don't know.

 

[COcheesehead]

I sold a muni that had its third downgrade in a row. Now boarding on junk. It was in the worst space for muni defaults, elder care facilities. I have never had a bond default, don’t need one now.

 

[Mr._Graybeard]

I sold a muni that had its third downgrade in a row. Now boarding on junk. It was in the worst space for muni defaults, elder care facilities. I have never had a bond default, don’t need one now.

Yeah, those elder care coupons can be tempting, but I think you have good reason to be wary. I also stay away from suburban tax-incremental development districts. I've seen too many struggle financially.

 

[53anddone]

Curious how much of folks investible assets they hold in Munis? I am around 15% at the moment and with the recent run up am tempted to add.

I buy individual bonds for my state (VT) and believe that in a high tax state like ours they are pretty valuable. Yields have finally gotten pretty attractive.

I just turned 60 and most of the bonds I bought will help cover me until SS and RMD times.

 

[njhowie]

Curious how much of folks investible assets they hold in Munis? I am around 15% at the moment and with the recent run up am tempted to add.

I buy individual bonds for my state (VT) and believe that in a high tax state like ours they are pretty valuable. Yields have finally gotten pretty attractive.

I just turned 60 and most of the bonds I bought will help cover me until SS and RMD times.

1/99 AA here - with most of the 99 in individual munis. As my maturities and redemptions come in, I reinvest in new/additional munis. Interest rate hikes are simply increasing future cash flow for me.

In my view, the key to making munis work is to be comfortable regardless of what is happening in the markets. Lots of folks are really beginning to squirm because they talked a big game preaching how they were good with their AA, when in reality, they never experienced a (deep) bear market. So, know thyself, don't over-allocate to munis or any other asset class. Nibble, spreading the money around...long term, short term, etc. Even if you choose to do it through muni bond funds - do not plow everything in to just one fund (category).

If buying individual bonds, there are some pretty great deals available right now, and there will likely be more between now and year end. After that, my crystal ball is very cloudy.

 

[53anddone]

Sage Advice. I agree that for the next few months things look pretty attractive in Muni Land.

 

[COcheesehead]

Curious how much of folks investible assets they hold in Munis? I am around 15% at the moment and with the recent run up am tempted to add.

I buy individual bonds for my state (VT) and believe that in a high tax state like ours they are pretty valuable. Yields have finally gotten pretty attractive.

I just turned 60 and most of the bonds I bought will help cover me until SS and RMD times.

I hold about 50% in munis, 70% total in bonds. Almost all are individual issues.

 

[perinova]

I have been a happy owner of a a muni bond fund a-la VCADX for a while; and thanks to the good on this forum I am purchasing bonds using the Fidelity tool.

My purpose is to eventually set-up a bond ladder and have a higher return than VCADX. However I have had a few bonds recalled. So I am facing the possibility to have to constantly buy some new funds to replace the recalled ones.

I am surprised to have those funds recalled in such a climbing rate environment (those funds had a coupon rate of 5%). Am I doing something wrong? Did I miss indication those funds were facing recall possibility? I was looking for a good deal, maybe the sellers knew something I didn't?

 

[njhowie]

I have been a happy owner of a a muni bond fund a-la VCADX for a while; and thanks to the good on this forum I am purchasing bonds using the Fidelity tool.

My purpose is to eventually set-up a bond ladder and have a higher return than VCADX. However I have had a few bonds recalled. So I am facing the possibility to have to constantly buy some new funds to replace the recalled ones.

I am surprised to have those funds recalled in such a climbing rate environment (those funds had a coupon rate of 5%). Am I doing something wrong? Did I miss indication those funds were facing recall possibility? I was looking for a good deal, maybe the sellers knew something I didn't?

You shouldn't fault yourself for bonds being called and not having the foresight to see it coming. However, at this time if you are having bonds called, it's not a particularly terrible thing as you can pretty easily find replacements at higher yield and likely better quality. Some of the investing gurus are beginning to say that bonds (in general) are now a good place to put investment money.

One thing that you can do in advance of buying any muni bond is to check the filings on EMMA...which you should be doing to some extent anyhow. Many times, if an issuer is considering calling, they will make filings (voluntary disclosure) that they are considering issuing new bonds...for the purpose of retiring existing outstanding bonds. They may even specifically indicate the bond issues under consideration for being called.

Aside from that, the most you can really do is simply compare coupon rates with current interest rates (for similar maturity) and apply standard logic - would they save a lot of money by refinancing at this time? Does the issuer have a lot cash on their balance sheet which they could use to redeem some of their outstanding (higher coupon) bond issues?

Regardless of all this, when purchasing any bond, you do need to consider the call dates as well as mandatory sinking fund redemptions and figure that in to your yield/total return calculations.

 

[njhowie]

Just bought 9 year A+ rated non-callable/no sinking fund 7.597% YTM (2.73% coupon).

 

[Mr._Graybeard]

I hold about 50% in munis, 70% total in bonds. Almost all are individual issues.

About the same here.

 

[Mr._Graybeard]

Just bought 9 year A+ rated non-callable/no sinking fund 7.597% YTM (2.73% coupon).

Nice buy!

 

[njhowie]

Received 2 calls plus a 50% sinking fund redemption this morning - redemption dates in 4 weeks.

This morning purchased AA-rated June 2040 2.892% coupon @ 57.75 (ask was 58.2) for 7.125% YTM, callable June 2030 for 11.25% YTC. Dealer had purchased for 55.56, so I gave him most of his desired profit...if YTM were lower, I would have played cat and mouse trying to get closer to 57, but I didn't want to risk someone jumping in and stealing it from under me.

 

[aja8888]

Received 2 calls plus a 50% sinking fund redemption this morning - redemption dates in 4 weeks.

This morning purchased AA-rated June 2040 2.892% coupon @ 57.75 (ask was 58.2) for 7.125% YTM, callable June 2030 for 11.25% YTC. Dealer had purchased for 55.56, so I gave him most of his desired profit...if YTM were lower, I would have played cat and mouse trying to get closer to 57, but I didn't want to risk someone jumping in and stealing it from under me.

Nice.........June 2040 maturity. Heck, I'll be a few years shy of 100 when that matures!