Bogleheads

[brainstem]

Good morning

The Intermediate Muni Bond fund (along with hi yield) has dropped about 3% in value over the last 10 days -- quite a rapid change.

Be curious about opinions as to why -

Inflation risk
Risk to Bond Insurance coverage
Market dislocations - banks/hedges raising cash
Fears of credit risk of issuers

I would like to think it reflects 1 and 3 -- but would like to hear if folks think is reflects the second item ---

Finally, is this a buying opportunity, much like August 07 when bonds were dumped by banks as they ran to raise cash?

[indexfundfan]

That's an interesting question. I would like to hear comments too.
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My signature has been deleted.

[baw703916]

I think that if inflation risk were the major factor, (non-TIPS) treasuries and munis of comparable duration would move in the same direction, since they have the same inflation risk exposure. SInce they've gone opposite ways for the last six months, I'd say that inflation isn't the major factor.

Best wishes,
Brad
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I don't foresee any Black Swans appearing in the future

[House Blend]

Not sure if its related, but there's an interesting article in today's SF Chronicle about unusual goings-on in the world of tax-exempt MMF's, which are more or less ultra short munis:

http://www.sfgate.com/cgi-bin/....VV8GLG.DTL

Note that they quote Vanguard's Pamela Tynan.

[brainstem]

[Wagnerjb]

Brainstem said:

[indexfundfan]

[mithrandir]

We tend to grouse when our funds decline "in excess" of expectations.

I bought VG Intermediate Muni 3 weeks ago so of course I am a little chagrined about the recent "poor performance". However, I tell myself that things are actually going according to plan. My TSM and total international market investments have done well over the same time period - there's that negative correlation we investors seek. I also have Short-Term Bond Index in my taxable account because federal, corporate and municipals do behave differently.

So you can say that the Muni funds have been offering diversification lately. The price declines may be fleeting because Munis are looking even cheaper compared to Treasuries. I may add a little to my position.

[hollowcave2]

It could be that interest rates have crept upward in the longer end of the yield curve, steepening the curve as the short end experienced declining rates. The Fed only directly controls the ultra short end of the curve... the market reacts with the rest of the yield curve. It seems like future rates are expecting a bit more inflation, something that has been reported today.

If you are a long term holder of a bond fund, slowly increasing rates are good because you will ultimately get a higher total return due to the increased income.

Steve

[astroturf]

Here's another explanation on the dislocation of the muni bond markets:

TOBs drive up volume of muni variable rate ratings

The anomalies occurred in August, November, January and apparently during the last few days. TOBs (muni bonds derivatives) are widely used by tax exempt money market funds to juice up the yield a little bit.

[Paladin]

[Gekko]

more pain today.

"If I ever get out of here,
Thought of giving it all away
To a registered charity.
All I need is a pint a day
If I ever get out of here."

[Paladin]

[Gekko]

down another 1% today. WTF????????????

[dougpnca]

Over the years, I've come to the conclusion that there are way too many things that influence the price of bond funds to put your finger on just one or two as the driver for price changes. Moreover, what action can you take? Buy, sell or hold is about it.

Being CA residents we've owned various CA tax exempt issues. Our reasons for owning are simply for income. I have found trading bond funds requires greater timing skills than I possess (guess how I learned that lesson). Individual issues are bought & held until called. You've got to be really good & really quick to make money trading in bonds.

Buying opportunity? How many times have we been reminded that there is no bad time to make a good investment?

dougP
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every dollar not spent is a buck & a half you don't have to make.

[grayfox]

Has the world gone crazy? According to Bloomberg
10-year Treasury yields 3.64
10-year Municipal yields 3.67

CA LT TE dropped -1.19% today
since Feb 11 it's down from 11.47 to 10.89 about 5%
The last time it dropped this low was 2000

This has got to be the bargain of the 21st century
Some weird stuff is going on.

[grok87]

[Ariel]

When I see these "obvious mispricings" I always wonder which of two scenarios makes more sense:

1. Someone knows something bad about the seemingly cheap security (or class of securities). For example, maybe county X or state Z is in serious trouble and about to default on some bonds.

2. Someone else is in trouble and dumping whatever they can to raise capital, creating a temporarily inefficient market. For example, maybe the Sludge & Dregs Hedge Fund made a bad and highly leveraged bet on Guano & Crap Mining Co, and is now selling their conservative Milwaukee Sewer Authority bonds at a deep discount to raise capital, sending flu-liking shivers and leaks through the muni world.

How can I tell which witch is which? I can't! Is it an efficient market? Hell no, not at present! But I know that the smart money is keeping quiet about the real opportunity and mispricings until after they've milked the inefficiency for every d**n cent they can!
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Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)

[baw703916]

A Wall Street Journal Article from today...

Apparently it's variable-rate demand notes, as opposed to (or more precisely, in addition to) auction rate securities:

New Monkey, Same Backs
Another Debt Market For Governments Loses Buyers, and Rates Rise

[KAWill70]

The 1987 period saw two large declines in the Municipal Bond Market, and both drops were in the range of 10%. Hopefully we won't reach that extreme this time.

http://bigcharts.marketwatch.c....mp;time=20

The next link is an explanation written in 1991.

Sounds a lot like the current situation.

http://money.cnn.com/magazines..../index.htm

Kent

[bob u.]

Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/....refer=home

Bob U.

[brainstem]

Useful, Bob U

Since my first post, I have thought of other options related to the accelerated price decline:

Inflation risk
Risk to Bond Insurance coverage
Market dislocations - banks/hedges raising cash
Fears of credit risk of issuers
Investor withdrawals - forcing sales
Revaluation of toxic securities

Vanguard has stated it has been careful in its investments (at least in CDOs and CMOs) but perhpas it was in some auction rate material - on the other hand, with its size, holding auction rate securities should not be much of a problem -- unless a secondary market would force an accounting repricing that might not be relevant if the security was held to maturity (granted in 15 years)

So this could be a supply and demand phenom - but if rates keep going up, one would thing it will attract buyers to take advantage of its return vs taxable securities

[kenschmidt]

I know munis have been unusually volatile over the past couple of weeks, but I've owned the Vanguard IT Muni Fund (or whatever they are calling it these days - VWITX) for a long time and in spite of all the angst, it's only down 2% YTD. I have equity funds that have dropped by that in a single day before.

Bond fund returns have two components - capital return - as the values of the bonds increase or decrease - and income return - as the bonds pay interest. Right now, capital returns on munis are negative. In fact, they suck. But, future income returns are increasing.

So, I personally am not getting too bent out of shape about this. Bond funds do go down sometimes, but everytime the price drops, the yield increases, which benefits you in the long run.

Ken

[Valuethinker]

[mithrandir]

[nofreelunches]

Another external force right now on Munis are closed ended funds. There are a lot of closed-ended muni bond funds, and they typically are leveraged at about 25%. With the bond insurer "scare", the interest rate on the margin money is going up, so leveraging is not working as well. The closed-ended funds sell some munis to pay back the margin, which puts pressure on muni bond prices, which causes the margin to get bigger again, and you know this spiral.

[learning]

According to Vanguard, the Intermediate Tax-Exempt fund does not hold auction rate securities, or floating notes, or whatever new acronym will surface next week in the Wall Street Journal.

They told me they hold only plain vanilla municipal bonds, and that Vanguard does its own credit analysis -- and chooses not to rely on rating agencies like S&P, etc. to assess credit worthiness.

I asked Vanguard last night if there were any holdings in the Intermediate Tax-Exempt fund which would be permanently impaired. (that is, would not recover once the market recovered.) They said there was not -- there had been no defaults, and they were not expecting any.

We're sitting tight and waiting for the storm to pass.

[astroturf]

[nofreelunches]

I wish Vanguard had a (developed world) global bond fund. Many of those funds are up 10%+ YTD, and nicely offset the whole inflation/currency/ debasement issue. They pay 5-7%, but the fees are too high from other vendors, and I think Vanguard could easily beat the fees. Yes, they are foreign, but if done right, they are relatively safe. (I am not too worried about Norway or New Zealand Government bonds having trouble.) Besides, some countries believing in protecting their currency and tough out the downturns, which helps the savers.

[grok87]

[astroturf]

[psteinx]

It sounds like the price drops are because of problems with those insuring the bonds, right?

But muni bonds very rarely default, so wouldn't that mean the insurance is largely superfluous? Is there some other reason to be more concerned about muni defaults now than a year ago?

Or is this largely a question of liquidity and a short term supply/demand imbalance in this market segment?

===

I'm considering moving some money into munis, probably on a relatively short term basis. But I have a few questions about Vanguard's muni offerings...

1) If I look on Vanguard's web site, I see "SEC Yield", with a footnote that, when I click on it, says it's based on YTM for the last 30 days. But if prices have fallen sharply in the last week or so, then the actual current yields (as of today) would likely be higher, right?

2) Muni bond markets are relatively illiquid. I'm guessing that Vanguard determines the daily NAV of its funds based not entirely on what the bonds within those funds traded at, but also based on some models (many of the individual bonds probably trade rarely). This introduces the possibility of stale pricing. When the markets barely move, that's not too important, but in a sharply falling market, if Vanguard's prices are a little bit stale, then the NAV could be a bit higher than it could/should be, meaning someone buying a muni bond fund now is overpaying. On the other hand, I generally trust Vanguard. Is there a real risk of stale pricing here?

3) Momentum. It seems to me there is a risk of momentum in a small-ish, thinly traded market. Should I be worried about this if I'm thinking about moving into muni funds?

[Valuethinker]

[snowman9000]

[baw703916]

Perhaps related, perhaps not, the SEC has also been investigating a lot of questionable goings-on in the municipal bond market. This is almost certainly good in the long run, but may have a temporary chilling effect on market makers, right at the moment when liguidity is in the most demand.

link1

link2

Best wishes,
Brad
_________________
I don't foresee any Black Swans appearing in the future

[baw703916]

[learning]

This article from Reuters does a nice job summarizing recent troubles in the municipal bond market:

http://www.reuters.com/article....3120080228

[psteinx]

But how many institutional entities are holding munis? I would think that, because they're tax advantaged, munis primarily reside in the accounts of individuals, either directly or indirectly (i.e. through funds).

[psteinx]

BTW, I'm not so sure that muni bond prices are true random walks.

Look at the price history of VWLTX:

http://finance.yahoo.com/q/hp?s=VWLTX

From 2/11/08 to 2/28/08 (the most recent date shown), prices have fallen 12 straight times.

The odds of this happening by pure chance are, I think, 1 in 4096 - i.e. if there are 250 trading days in a year, we should see stretches of 12 straight down days about once every 16 years. It's possible that in fact this is just bad luck - a once in every 16 years sequence of bad trading days. But it's also possible that there's a momentum effect going on...

[drjdpowell]

[dougpnca]

California will auction $1.7 billion in G.O. bonds next week. They have a new program wherein individuals get first crack (thru brokers & VG handles thru Pershing) and then the institutions. I believe the previous issue attracted roughly half it's subscriiptions from individuals. It will be interesting to see the trend next week on proportion purchased by individuals. Maybe a gauge of small investor confidence?

dougP
_________________
every dollar not spent is a buck & a half you don't have to make.

[grok87]

[baw703916]

[Paladin]

[indexfundfan]

This too shall pass. Amidst the current gloom in the muni bond market, I want to post an article from last August:

http://www.reuters.com/article....0920070830

[Paladin]

[Paladin]

[Paladin]

[indexfundfan]

Because muni's are substitutes (though not perfect) for taxable bonds, there is definitely a price floor at which investors would decide that muni's are a much better deal than the taxable counterparts. This is especially so if there is another rate cut or if there is a political climate change that makes higher tax rates eminent.

At of now, muni's are already yielding more than treasuries of the same duration in nominal terms. In fact for my long term holdings, I am tempted to add them.
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[psteinx]

FWIW, I've opened a separate thread with some practical questions regarding buying specific state bonds, here:

http://www.diehards.org/forum/....429#164429

It may be of interest to some folks.