What is happening with HY Muni Bonds today? Tracking down 14%

[audreyh1]

There was also some mention of PE (e.g. Carlyle Group) directing their subsidiaries to drawn down completely their credit lines (i.e. hoard cash) creating additional pressure on banks to raise funds.

Interesting! A lot of stories like this come out afterwards - often some stressed investment house making big moves.

 

[NW-Bound]

Having just too much money in money market and very little in bond, I decided to buy some of the latter.

The liquidity of stock options also dries up. Yesterday, as all stocks crashed hard, there was no bid on any options. Many options I sold should be worthless, and I usually close them out by buying them back for 5c or less. The market makers were gone.

I will wait until next Friday 3/20 for them to expire worthless, before I can sell new covered calls for April.

 

[Spock]

There was also some mention of PE (e.g. Carlyle Group) directing their subsidiaries to drawn down completely their credit lines (i.e. hoard cash) creating additional pressure on banks to raise funds.

News (rumours?) said Boeing was going to hit all of their credit revolvers by today.
Blackstone and Carlyle are supposedly advising all of their companies to tap all available lines of credit before the banks cancel them.

 

[phil1ben]

I do not own Bond Funds but I do have about 75 individual muni bonds mostly rated AA. A Schwab algorithm prices these daily without regard to market sales which are very infrequent. Nevertheless, my bonds on average suffered a 2.5% drop in value yesterday when the DOW closed down 2300 points. Similarly, last week when the 10-year dropped almost 50 basis points in a single day I did not see the huge price increase that one would expect.

I then spent some time looking for actual trades that occurred recently. Only a few bonds had actual trades within the past week but they were at a much higher price than the algorithm. During the stable times the algorithm is fairly close to predicting value but now it appears way off.

 

[COcheesehead]

I do not own Bond Funds but I do have about 75 individual muni bonds mostly rated AA. A Schwab algorithm prices these daily without regard to market sales which are very infrequent. Nevertheless, my bonds on average suffered a 2.5% drop in value yesterday when the DOW closed down 2300 points. Similarly, last week when the 10-year dropped almost 50 basis points in a single day I did not see the huge price increase that one would expect.

I then spent some time looking for actual trades that occurred recently. Only a few bonds had actual trades within the past week but they were at a much higher price than the algorithm. During the stable times the algorithm is fairly close to predicting value but now it appears way off.

There was a really short window this morning where there were some deals on individual muni bonds. I entered 3 orders all at ask and only got 2 of them. I think people saw the odd imbalances and took advantage of them. I just went back on and things are back to where they were yesterday. There was a brief moment were there were some yield to worst muni bonds in the 3% range for high quality in the 5-6 year range. Those are gone.

 

[Ready]

With talks of States possibility being told to declare bankruptcy is there any risk of state municipal bonds and bond funds defaulting? I have sizable investments in both California municipal bond funds and nationwide funds through Vanguard.

 

[COcheesehead]

With talks of States possibility being told to declare bankruptcy is there any risk of state municipal bonds and bond funds defaulting? I have sizable investments in both California municipal bond funds and nationwide funds through Vanguard.

Let’s not take a single comment from McConnell and turn it into policy.

 

[OldShooter]

Definitely craziness in the credit markets. It’s probably primarily folks being forced to cover riskier bets gone bad.

The article goes on to talk about people just getting out, but in my experience, sudden asset mispricing is usually caused by leverage (e.g. margin) being unwound.

I have always been a little nervous about ETFs because of "authorized participants." These are third parties at the table with their own P&Ls to optimize and with no loyalty or obligation to the ETF shareholders. If I were an authorized participant during fast moving market periods, especially declines, I would sit on my hands and watch the spreads widen. This is pure speculation, of course, but based on some experience with human nature.

More: https://www.investopedia.com/terms/a/authorizedparticipant.asp

If my theory is correct, selling into a fast moving market is probably a bad idea.

 

[Starsky]

Let’s not take a single comment from McConnell and turn it into policy.

The guy who decides who will get the money said that. It is the de-facto policy. There is no bailout coming for the states or cities anytime soon. Sure, muni bonds just dropped all by themselves while everything else was flat.

 

[Ready]

So leaving political discussion out of this...if the states have to declare bankruptcy where does that leave municipal bond holders?

 

[MichaelB]

So leaving political discussion out of this...if the states have to declare bankruptcy where does that leave municipal bond holders?

Well, knowledgeable leaves me out, but I’ll add my $0.02 anyway. States cannot declare bankruptcy, but cities and counties can. There are many other issuers of muni bonds, such as water districts, transportation systems, and other revenue generating operations. All can declare bankruptcy and all can default.

 

[foxfirev5]

For me the red flags went up when munis were yielding above my common sense. There are no free lunches.

Who would see everything shutting down? There are consequences. Toll road revenues, local tax revenues slashed as well as income taxes.

Wake up kids, it all comes down to GDP. If your not producing it's not going to work. And I'm tickled to death with my CD ladder.

 

[njhowie]

The guy who decides who will get the money said that. It is the de-facto policy. There is no bailout coming for the states or cities anytime soon. Sure, muni bonds just dropped all by themselves while everything else was flat.

It's not going to happen - states will not be declaring bankruptcy.

Go see Andrew Cuomo's response. Kind of shines some light on the matter regarding who's state is being bailed out.

 

[COcheesehead]

States can’t run deficits- they have to have a balanced budget. So services will be cut, projects put on hold.

 

[njhowie]

So leaving political discussion out of this...if the states have to declare bankruptcy where does that leave municipal bond holders?

Most immediately municipal bonds at the state level would likely be affected.

Other municipal bonds, which are not obligations of the state carry on as usual. Many times, the local issuers will have better credit ratings and financial situations than the state they are in. In IL, NJ, CA and some of the other states which routinely make the headlines being in dire financial situations, there are many issuers within the state which are extremely strong which have nothing to do with the state.

The water utility which MichaelB brings up is a good example. Covenants of a water system municipal bond will indicate that rates are required to be set to provide some specified debt coverage ratio to provide in excess of the amount needed to pay for interest and redemption of their bonds. A debt coverage ratio of 125% is typical. Further, many require reserve accounts be set up to provide an additional buffer. Lastly, considering that most folks are going to pay their water bills (or risk being cut off), water utility municipal bonds are among some of the safest.

 

[COcheesehead]

For me the red flags went up when munis were yielding above my common sense. There are no free lunches

There was a fire sale for sure and spreads widened with a rush for liquidity. It lasted a day or two. Smart investors scooped up the quality ones in a hurry.
If you look at EMMA, for the last 30 days buyers to sellers are running 1.5 to 1. Meaning there is a majority buying muni’s.

 

[Sunset]

States can’t run deficits- they have to have a balanced budget. So services will be cut, projects put on hold.

But IL owes about $203 Billion , so I guess they balance their budget by simply not paying for some things

https://www.illinoispolicy.org/repo...te-and-local-retirement-benefits-in-illinois/

 

[njhowie]

But IL owes about $203 Billion , so I guess they balance their budget by simply not paying for some things

https://www.illinoispolicy.org/repo...te-and-local-retirement-benefits-in-illinois/

Debt and deficits are technically not the same. Take your own situation. Do you take a mortgage (debt) to purchase your home? Do you personally run an annual deficit with your own budget? Simply because you have taken on a large debt?

You can have a balanced budget which is arrived at by taking on more debt.

 

[COcheesehead]

But IL owes about $203 Billion , so I guess they balance their budget by simply not paying for some things

https://www.illinoispolicy.org/repo...te-and-local-retirement-benefits-in-illinois/

NJHowie said it best.
Now if they only had a printing press like the Feds.

 

[jazz4cash]

My single state intermediate term muni fund has been underwater for the past 2 years. I just broke even a few weeks before the rush for the exits. My fund sank along with my individual bonds but the bonds have recovered while the fund is still sinking. The individual muni I bought yesterday, a housing authority revenue bond is showing a 3rd party price 9% more than I paid.

Individual bond buyer frequently say they plan to hold till maturity, but fund buyers don't have a maturity date to hang onto, so maybe they are more likely to sell.

 

[Spock]

re: "states can't do X" or "they can't do Y"
Right now all bets are off. The rule of law/property rights/etc that supposedly separated the US economy from 3rd world countries is cracking. Yesterday a governor just up and declared that renters can direct the landlord to use their damage deposit in lieu of rent and that landlords can not demand the damage deposit be replenished until 6 months after the virus crisis has ended (and there are forecasts that could be years from now... nobody knows).

States can't go bankrupt? A stroke of a pen buried into 2000 pages of the next stimulus bill that doesn't get read before being voted on can change that. The 2008 crisis response proved that when the administration tossed creditor succession contract language... same back in 1933(?) when contracts stated loans were to be repaid in gold where unilaterally changed.


Its just ink on paper and creative writing is a specialty of law makers.

 

[Chuckanut]

My state has taken advantage of the last few years of rising tax revenue to increase spending. New programs for this, that and the other things. All are 'good' causes. They even increased a bunch of taxes in the last few years to raise more revenue.

Now the chickens are coming home to roost. Good luck with that.

 

[Sunset]

My state has taken advantage of the last few years of rising tax revenue to increase spending. New programs for this, that and the other things. All are 'good' causes. They even increased a bunch of taxes in the last few years to raise more revenue.

Now the chickens are coming home to roost. Good luck with that.

I had to check if you also lived in IL, as that is exactly what our politicians did.
At least our politicians are proud in the years they actually pass a budget.

 

[njhowie]

States can't go bankrupt? A stroke of a pen buried into 2000 pages of the next stimulus bill that doesn't get read before being voted on can change that. The 2008 crisis response proved that when the administration tossed creditor succession contract language... same back in 1933(?) when contracts stated loans were to be repaid in gold where unilaterally changed.


Its just ink on paper and creative writing is a specialty of law makers.

And DJIA, NASDAQ, S&P, stock and bond prices are just numbers that can fall 25%, 50%, or more from where they are today.