Why are my bonds down?

[Truckinalong]

What I can't wrap my head around, municipalities of all sizes are taking in significantly lower sales tax, conventions tax, toll roads, airport fees and on and on. Combined with significant additional expense in fighting covid it's a bad combination. The press tends to focus on the weaker credits, but even the best fiscally run municipality does not have an extra 6 months of year of liquidity just laying around. I also think we will see very much people unable to pay their property taxes. Then what, tax levy and foreclose on the town?

In other words it seems the idea of these muni's defaulting looks higher than ever. Given many of their debt payments are semi annual or annual we may not know yet.

I hope the experts here can tell me why I should not worry with respect to investing in muni bonds / funds specifically.

 

[COcheesehead]

Will some muni’s default, probably. Keep in mind muni’s are not a single entity. There are GO bonds and revenue bonds. Each has its own sources of revenue. Some will take a hit because lodging taxes are down for example, others will do just fine.
Of the dozens of bonds I own, I have had one downgrade, a toll road and about 6-8 upgrades.
So when you talk of muni’s it’s hard to lump them all together. Take the time to watch EMMA https://emma.msrb.org/ and see how specific bonds are handling the crisis.

Debt is a funny thing. I see already where projects are being put on hold, layoffs coming, why? To conserve cash. If a municipality defaults the chances of getting debt in the future becomes difficult. Debt gets paid, until it doesn’t. Some have big reserves, some don’t.

High investment grade muni’s haven’t had a default in 50 years. Maybe that changes, maybe it doesn’t.

 

[Truckinalong]

All good points and things I get. I am mostly afraid of what we don't know in this case, that chart is very informative though. Does it include 1918 in it ;-)

 

[COcheesehead]

All good points and things I get. I am mostly afraid of what we don't know in this case, that chart is very informative though. Does it include 1918 in it ;-)

That is an interesting point. The rating system in place for muni’s during the Great Depression for instance was found to not be a good indicator of default. At that time many AA bonds defaulted so rating agencies had to change their methodology to more accurately rate at risk bonds. Do downgrades mean default? Not always, but hopefully they give us a better window into the murky waters ahead.
I will tell anyone investing in muni’s to understand what you have or intend to buy. Muni’s have traditionally been just below treasuries in terms of safety, but maybe it’s different this time.

 

[Truckinalong]

I'm a muni fund guy and I do understand how that makes me subject to NAV and perception whims of the market. Know it better now than ever! I do put faith though that the folks at Vanguard can pick better than me and manage their portfolio via sales as necessary.

 

[Truckinalong]

Muni funds like VWITX and VWAHX pulling back lately, not back to crash lows of March but maybe some value there?

I still can't think as we approach 20% unemployment what that ultimatley will look like for municipal entities of all levels and their cash crunch.

Thoughts?

 

[audreyh1]

Municipalities etc. are going to start laying off, I imagine.

 

[Truckinalong]

For sure they will, the question is how does all that affect muni values, especially muni bond funds whose NAV is subjecct to market perception more than holding actual individual bonds.

I think I read New Jersey runs out of cash in 4 to 6 weeks and won't be able to pay essential workers and 1st responders. They may be first but won't be last.

I am staying out of all the politics of it and just trying to wrap my head around what it means, really we have no precedent, we knwo historically the municapal bond market is almost default free but now, hmmmm?

 

[jazz4cash]

I’d buy/hold the bonds selectively. The funds not so much for the reasons you indicated.

 

[COcheesehead]

I buy individual muni bonds and hold to maturity.
Just about everything you want to know is in the audited financials.
The revenue streams are different for each bond so its hard to make blanket statements that X will go under or Y will run out of money.
You need to look at where the revenue comes from for the particular bond.
Some will be greatly impaired by the virus, some will not. I think we'll see defaults in lower grade issues, that is almost a given, but others with revenue tied to more secure income, will do just fine.

Some of the highest yielders now are for convention centers, sports arenas, mass transit, anything tied to lodging tax or hospitality related. I would expect some of these to have difficulty staying solvent.

 

[Gumby]

For sure they will, the question is how does all that affect muni values, especially muni bond funds whose NAV is subjecct to market perception more than holding actual individual bonds.

I think I read New Jersey runs out of cash in 4 to 6 weeks and won't be able to pay essential workers and 1st responders. They may be first but won't be last.

I am staying out of all the politics of it and just trying to wrap my head around what it means, really we have no precedent, we knwo historically the municapal bond market is almost default free but now, hmmmm?

The last state to default on its bonds was Arkansas in 1933. Given their taxing power, I think it unlikely that any state will default on a general obligation bond. And states can't file for protection under the Bankruptcy Code. Special purpose/project bonds are a different story. As are municipalities.

 

[scrabbler1]

The last state to default on its bonds was Arkansas in 1933. Given their taxing power, I think it unlikely that any state will default on a general obligation bond. And states can't file for protection under the Bankruptcy Code. Special purpose/project bonds are a different story. As are municipalities.

I found this article about bond defaults. It begins with the Arkansas one you described. I was actually hunting around for the 1990s one in Orange County, California, because I had just begun investing in national muni bond funds around that time.

https://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/

 

[Truckinalong]

It does all come down to individual issues for sure and I like to believe the Vanguard team does their homework for those of us who don't want hassle so not all that concerned. The fund will go up and down but for income it will be fine.

I think I was more looking for general dialogue on how all this afffects munis and their survival plans really.

Overall I think munis that can go to public market will to raise funds with GO obligations that unfortunately will be used to pay expenses increasing long term debt loads on them. Still able to make the payments end of day but not a positive for financial profile.

 

[socca]

It does all come down to individual issues for sure and I like to believe the Vanguard team does their homework for those of us who don't want hassle so not all that concerned.

The problem is that when times are good bond analysts may get lazy and complacent, including the folks who work for VG. Economic times were pretty good prior to the COVID-19 crisis (at least superficially - counter-arguments could be made regarding the sustainability of massive U.S. deficit spending, etc.) VG's bond analysts may be taking a closer look at their portfolios these days - let's hope so!

If you'd like to do an independent review of VG's bond portfolios, be my guest! For example, VG's popular Intermediate-Term Tax-Exempt fund had ~9,700 bonds as of 03/31/2020. Personally, I've got better things to do than examine the credit quality of 9,700 muni bonds. I'm more than willing to pay VG to keep an eye on those bonds.

 

[BeachOrCity]

It does all come down to individual issues for sure and I like to believe the Vanguard team does their homework.

For index funds?

Don’t plan on that! They are following the index and do little to no analysis of the underlying companies.

If you want them putting thought into it buy and pay the fee for Wellesley or Wellington.

 

[Truckinalong]

For index funds?

Don’t plan on that! They are following the index and do little to no analysis of the underlying companies.

If you want them putting thought into it buy and pay the fee for Wellesley or Wellington.

VWAHX is not a true index fund, up to 20% of it is non rated or below investement grade assets they choose. It tends to pay 1% more or so over the intermediate fund but is subject to more price fluctuation due to slightly longer duration than VWITX and this portfolio composition.

 

[BeachOrCity]

VWAHX is not a true index fund, up to 20% of it is non rated or below investement grade assets they choose. It tends to pay 1% more or so over the intermediate fund but is subject to more price fluctuation due to slightly longer duration than VWITX and this portfolio composition.

While the above is true, the management fee portion of this fund's expense ratio for admiral shares is .07%. I can't imagine that it is much more than just buying "what's on the list" at that expense ratio. For comparison, total bond is .04% for the management fee portion.

You can't get something for nothing. If one wants a fund that is doing the analysis on the underlying bonds (rather than just an index or believing what Moody's says)....one has to pay for it. Maybe not pay top dollar, but it does have to be paid for.

 

[Truckinalong]

Agreed, individual tax situation (tax exempt may or may not matter) and risk profile matter to go for VWAHX based on personal objectives, not for everyone and I am not here to promote one way or other.

 

[socca]

Here are the VG muni bond fund AUM numbers for 03/31/20:

• VG Muni Money Market: 18.0
• VG Short-Term Tax-Exempt: 15.7
• VG Limited-Term Tax-Exempt: 28.8
• VG Intermediate-Term Tax-Exempt: 71.8
• VG Long-Term Tax-Exempt: 13.8
• VG High-Yield Tax-Exempt: 15.0
• TOTAL: 163.1

For reference, here is :
• VG Federal Money Market: 183.3

Here are the VG muni bond fund AUM numbers for 04/30/20:

• VG Muni Money Market: 18.2
• VG Short-Term Tax-Exempt: 16.1
• VG Limited-Term Tax-Exempt: 28.6
• VG Intermediate-Term Tax-Exempt: 70.6
• VG Long-Term Tax-Exempt: 13.5
• VG High-Yield Tax-Exempt: 14.1
• TOTAL: 161.1

For reference, here is :
• VG Federal Money Market: 188.4

Comment:
• no surprises since last month. The 'flight to safety' has slowed considerably but not stopped completely. The month-to-month increase in Federal Money-Market has slowed considerably, and the rate at which money is flowing out of the longer-term VG muni-bond funds has also dropped.
• it's interesting that some investors have taken advantage of the extremely steep yield curve at the short end of the VG muni bond fund yield curve to beef up their investment in Short-Term Tax-Exempt, which had a modest month-to-month increase in AUM.
• standard disclaimer: I don't bother trying to distinguish whether a change in VG bond fund AUM is due to client purchases / sales vs. a change in the market value of the bonds in the fund, so my conclusions may be bogus. I'm just SGOTI so you've been forewarned!