Muni Bond (and Muni Bond Fund) Discussion

[imbatman]

I was reading around on the Municipal market on defaults and stats and while this report is data through 2021 (report issued 2022), it was informative to me how your default risk really starts having a big multiplier each level you go down below A rated for munis (page 8-11 in below).

https://www.fidelity.com/bin-public...ors-service-data-report-us-municipal-bond.pdf

 

[njhowie]

I was reading around on the Municipal market on defaults and stats and while this report is data through 2021 (report issued 2022), it was informative to me how your default risk really starts having a big multiplier each level you go down below A rated for munis (page 8-11 in below).

https://www.fidelity.com/bin-public...ors-service-data-report-us-municipal-bond.pdf

We've referenced this report previously...but since we are on reply #1150+ it's doubtful anyone would go back and see it.

As we've said many times in the past, specifically because of the table on Page 8, stick to munis with ratings that begin with the letter A, and you have nothing to worry about.

Personally, I'd go down to Baa or even Ba if I was feeling really wild, or more likely found a rating I believed was incorrect (and deserved to be upgraded) - still well under 5% default rate at year 10.

 

[nelsonowe]

New Fido issues just dropped for Maryland Montgomery County Housing (A2)....a whole series but I got in on Jan 2060 4.95% (callable Jan 2032 and as others have indicated could be early for housing), DC0100CM7....quick turnaround as just dropped this afternoon and close 11:30AM on Monday

I'll be curious to see if they get repriced after closing. Virtually all of the new muni issues I've bought in the last year have been repriced a day or so after the order period closes, usually with a drop in yield of .05-.1%.

And the only notification is by email (usually in the mid-afternoon), and you have one hour to cancel if you don't like the reprice. Craziness.

 

[jazz4cash]

Virtually all of the new muni issues I've bought in the last year have been repriced a day or so after the order period closes, usually with a drop in yield of .05-.1%.



Craziness.

How were they priced when issued? I mentioned a few times about new issues priced way over par. Curious why it happens. Craziness indeed.

 

[imbatman]

Yeah I bought another MD issue (57419T2R1) a few weeks ago that dropped from 4.6% to 4.5% and yes, you had one hour to edit your order.

Strangely, my order for an IN issue (45505TJ36) was filled at par after the order period closed, and the next day (still a month before issued) they were re-available with a new order period at a $99.995.

Definitely throws a little variability into the process.

 

[COcheesehead]

How were they priced when issued? I mentioned a few times about new issues priced way over par. Curious why it happens. Craziness indeed.

I am getting a little out over my ski tips here, but I remember the pricing is set up so the buyer would not incur the de minimis taxation. Something like that.

 

[jazz4cash]

I am getting a little out over my ski tips here, but I remember the pricing is set up so the buyer would not incur the de minimis taxation. Something like that.

I keep getting confused by these rules. I guess I only considered de minimus for purchase below par. I keep thinking some committee decides a bond coupon will be X even when the market for similar debt is .95X so the price goes up and the yield ends up at the market rate of .95X. It seems the premium would benefit the issuer and underwriters too. My very 1st muni was a mew issue priced at par and I thought they were all done that way. I get it if the market moves the new issue price might deviate a bit.

 

[COcheesehead]

I keep getting confused by these rules. I guess I only considered de minimus for purchase below par. I keep thinking some committee decides a bond coupon will be X even when the market for similar debt is .95X so the price goes up and the yield ends up at the market rate of .95X. It seems the premium would benefit the issuer and underwriters too. My very 1st muni was a mew issue priced at par and I thought they were all done that way. I get it if the market moves the new issue price might deviate a bit.

There are some posts on this topic on here. I was going on memory and maybe a bad memory. Maybe you can find them. I have never bought a new issue muni because they were so unappealing. Every so often the secondary market delivers some gems and then the yield is no longer a guess.

 

[njhowie]

I have never bought a new issue muni because they were so unappealing. Every so often the secondary market delivers some gems and then the yield is no longer a guess.

Bingo - why take new issue? Pricing/yield is going to be favorable to issuer. Secondary market is a real "market" - real buyers and sellers in an extremely illiquid market. Buyers can get deals if they are willing to put in a little effort.

 

[jazz4cash]

So I’ll monitor those MD muni new issues just to see how the pricing reacts in secondary market. They have some real competition among treasuries other debt securities to lure investors. It feels like munis are already turning a corner to be more competitive, at least in the new issue space.

 

[COcheesehead]

So I’ll monitor those MD muni new issues just to see how the pricing reacts in secondary market. They have some real competition among treasuries other debt securities to lure investors. It feels like munis are already turning a corner to be more competitive, at least in the new issue space.

I just wonder how soon you’ll see secondary offerings of any of those new issues. Someone would lose money right out of the gate unless there is a dramatic turn in rates near term, which may happen, but probably not.

 

[imbatman]

De minimis is 0.25 per year to MATURITY and not potential/ eventual actual call date, I believe, so seems very unlikely that any new issue would be so badly mispriced/ couponed to meet that.......but I am still kind of new in purchasing these so maybe it happens.

 

[COcheesehead]

De minimis is 0.25 per year to MATURITY and not potential/ eventual actual call date, I believe, so seems very unlikely that any new issue would be so badly mispriced/ couponed to meet that.......but I am still kind of new in purchasing these so maybe it happens.

Maybe Freedom56 explained the quirky new muni pricing and that thread is gone. Someone on here did. I remember it and it wasn’t real intuitive.

 

[MichaelB]

No threads discussing muni bond pricing have been deleted.

 

[COcheesehead]

No threads discussing muni bond pricing have been deleted.

I was referencing the golden period thread that is gone.

 

[braumeister]

I was referencing the golden period thread that is gone.

No it isn't.

https://www.early-retirement.org/forums/f28/we-are-entering-a-golden-period-for-fixed-income-investing-114400.html

 

[nelsonowe]

How were they priced when issued? I mentioned a few times about new issues priced way over par. Curious why it happens. Craziness indeed.

Every new issue I have bought have been at $100 (par, which doesn't change on the repricing). The actual interest rate is what changes (e.g. from 4.6 to 4.5%).

The new issues over par have a correspondingly higher interest rate (to compensate you for paying $100 + $x and only getting $100 back at call/maturity. I'd guess they do it for two reasons:

1. People like a higher interest rate number. 6% feels better than 5.5% even if the yield is the same due the the higher price.

2. De minimus rules change the tax treatment to ordinary income once the price falls below the threshold, which is measured from maturity value (par). So if the threshold on a 20 year bond is $95 (100 - (20 x. 25)), it takes a lot more decrease in value to hit the threshold if you start at $108 than if you start at $100.

Hope that makes some sense?!

 

[jazz4cash]

I don’t follow because I still believe de minimus only applies for bonds sold above the purchase price if the gain exceeds the de minimus threshold. If a bond is bought above par it seems unlikely it would be sold at an even higher price exceeding de minimus threshold.

 

[nelsonowe]

I don’t follow because I still believe de minimus only applies for bonds sold above the purchase price if the gain exceeds the de minimus threshold. If a bond is bought above par it seems unlikely it would be sold at an even higher price exceeding de minimus threshold.

I don't think it's the gain that determines the threshold, but instead the discount price (i.e. how far below $100 (par) price) you paid on the secondary market. See this from the Municipal Rulemaking Board (part of EMMA).

https://www.msrb.org/sites/default/...-Considerations-for-Buying-Discount-Bonds.pdf

 

[jazz4cash]

I don't think it's the gain that determines the threshold, but instead the discount price (i.e. how far below $100 (par) price) you paid on the secondary market. See this from the Municipal Rulemaking Board (part of EMMA).



https://www.msrb.org/sites/default/...-Considerations-for-Buying-Discount-Bonds.pdf

I agree but I must not be making myself clear. The threshold is a fixed formula (roughly sale price minus purchase price divided by yrs to maturity). My confusion resolves around references to de minimus treatment for a bond purchased at a premium to par.

 

[jazz4cash]

It appears the Mont Cnty MD housing bond deadline has been pushed from 11:30 am to 4pm. I presume that means sales are a bit slow so maybe they will show up on the secondary market soon.

 

[COcheesehead]

I agree but I must not be making myself clear. The threshold is a fixed formula (roughly sale price minus purchase price divided by yrs to maturity). My confusion resolves around references to de minimus treatment for a bond purchased at a premium to par.

Maybe this will help. Why premiums exist on new muni bonds.
https://www.pimco.com/en-us/resources/education/understanding-premium-municipal-bonds

The reality is new issue munis rarely look attractive.

 

[imbatman]

Some decent insured tax exempt new-issue bonds showing on Fido right now (open order period):

TX Bridgeport (AA) 4.25% at $98.498 (4.34%) 30-year (first call 10-yrs 2033)
TX La Vernia (AAA) 4.125% at $97.365 (4.30%) 25-year (first call 9-yrs 2032)

 

[nelsonowe]

I agree but I must not be making myself clear. The threshold is a fixed formula (roughly sale price minus purchase price divided by yrs to maturity). My confusion resolves around references to de minimus treatment for a bond purchased at a premium to par.

Let me see if i can make this any clearer (to myself as well!) Buying at a premium means the value of the bond is less likely to be negatively affected
by falling into de minimus territory. A premium bond should hold value relatively better than a par bond in a rising rate environment if you choose/have to sell.

From AllianceBernstein:
"A premium bond can provide a better cushion against de minimis than a par bond, because the par bond is likely to reach its de minimis threshold much sooner. For example, a 10-year par bond and a 10-year premium bond have the same 97.5 de minimis threshold. But at a price of 100, a par bond would have only a 2.5 point cushion; a premium bond selling at 116 would have an 18.5 point cushion."
https://www.alliancebernstein.com/library/premium-municipal-bonds-more-bang-less-buck.htm

 

[imbatman]

It had never occurred to me to look at Taxable munis but I can see some of their appeal now. In my state, I believe even taxable munis are exempt (would have to research more before depending on that for a purchase decision), and if true would make them equitable to Agencies if I buy from my state.

Today (@ Fido New Issue) state of Nebraska Housing (AAA) is selling a 29-year (9-year call in 2032) 5.668% Taxable (closes 11:30AM today)

To get those 9-years without a call in corporates or agencies, I will have to dip well below AAA to get that kind of yield. Nebraska housing is also selling a Tax Exempt version for 4.65%, which is a better return for me if I were to purchase, but the Taxable is something I would have never looked for without this forum.