Bogleheads

BostonBogle · Joined: 06 Oct 2007 Posts: 200

I have read in recent days in the Wall Street Journal that this is perhaps the best time in our lifetime to invest in municipal bonds. I also read about Wilbur Ross investing one billion dollars in municipal bonds and making a 300-million dollar profit in just three days this week.
Should I be jumping to take advantage of this opportunity.?
If so,, which Vanguard municipal bond fund should I invest in?
Should I do so in my IRA or my taxable account.?
I already have a significant 6 figure sum in the Ma Tax Free fund in a non-IRA account but since I live in Massachusetts it is tax free federal and state....it just makes me vulnerable to the dreaded AMT.

grok87 · Joined: 27 Feb 2007 Posts: 3420

DaveTH · Joined: 05 Apr 2007 Posts: 2449

duhmel1 · Joined: 10 Jul 2007 Posts: 400

It's just about too late to take advantage of the muncipal bond 'panic'. For example, the Vanguard Ca LT Bond fund (VCITX) dropped by about 5% between Feb 13 and Feb 29 but has recovered by nearly 4%. Thus there isn't a lot of near-term movement in the NAV that should be expected. The yield of 4.11% is not that much greater than the no-risk Cal MMF (2.995). Long-term interest rates should start increasing this year so principle is at risk. The intermediate fund also has risk to the NAV in the long-term as evidenced by its large drop and recovery also in the past few weeks.

If you are brave enough to venture into individual munis you can get 20-year insured bonds issued by rock solid entities that will pay over 5% - no principal risk if you hold to maturity.

Valuethinker · Joined: 11 May 2007 Posts: 13357

duhmel1 · Joined: 10 Jul 2007 Posts: 400

wshang · Joined: 03 Feb 2008 Posts: 420

There is a point which needs repeating. Insurers' credit rating is not the same as issuer credit rating. An insurer failing should not prevent an otherwise solvent municipality from paying debt.

A less than "rock solid" issuer can have their credit rating increased by MBIA. But, munis have intrinsic default rates which are orders of magnitude less than corporates. Most munis are not rated.

http://www.publicbonds.org/public_fin/default.htm

n 1999 Fitch Ratings published its first study of municipal defaults, which was updated in 2003.2 The latter study covered 2,339 cases of municipal defaults worth $32.8 billion between 1980 and 2002. It found that the cumulative default rate on bonds issued through 1986 (as they approached or reached maturity) was 1.5 percent, while the cumulative default rate on bonds issued between 1987 and 1994 was 0.63 percent.

duhmel1 · Joined: 10 Jul 2007 Posts: 400

In addition most of the municipal bonds that do default are ones that are unrated. Muni bonds must have issuer ratings of at least BBB or MBIA will not insure them. At this rating, there is virtually no default unless there is an unforeseen occurrence such as the Orange County debacle 10 yrears ago.

Thus we have the Catch-22 - if a bond is insured it is solid enough by itself to not really need insurance. If it is risky, the insurance companies (except for ACA) would not insure it. This is why there has been a dramatic drop in bonds being insured during the past 3 months.

Valuethinker · Joined: 11 May 2007 Posts: 13357

snowman9000 · Joined: 26 Feb 2008 Posts: 874

My take on this buying opportunity of a lifetime is that the people who are saying that are comparing munis to Treasuries. If you compare munis to highly rated corporates, the story isn't compelling.

It's more likely that this is the selling opportunity of a lifetime for Treasuries, IMO.

It's important to note that the bond market disagrees with me, however. Smile

They must feel that 1) we are headed for deep doo-doo, with rising risk of defaults in highly rated corporates, and 2) they are not too worried about inflation.

The Treasury market is HUGE. It definitely is saying something.