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astroturf
Joined: 26 Aug 2007
Posts: 548
Location: Greater NYC Area
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 Posted: Sat Sep 27, 2008 8:56 am Post subject: An explanation on the muni markets disarray |
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From Bloomberg, "Muni `Hydra' Bites Denver, New York; Rates Hit Record (Update3) "
http://www.bloomberg.com/apps/....refer=home
Emphasis mine.
| Quote: | A major reason rates are climbing is dealers who underwrite most municipal securities are undermining demand by committing less capital to trade the obligations. The cutback follows $520 billion of writedowns and losses involving subprime mortgage- related securities, analysts at Citigroup Inc. and JPMorgan Chase & Co. said in reports this week.
As normally less-expensive short-term rates surpass long- term yields, it also forces some investors who seek to profit from the usual difference to unwind their trades and sell bonds, said Matt Fabian, managing director at Municipal Market Advisors, a Concord, Massachusetts-based research firm.
Money Fund Outflows
Variable rates skyrocketed as investors pulled about $38 billion from tax-exempt money-market mutual funds in two weeks, or 7 percent of the assets as of Sept. 16, based on weekly data from iMoneyNet of Westborough, Massachusetts. Investor redemptions drove the money funds to sell variable-rate bonds back to banks who act as resale agents or backstops. |
Now the Bloomberg piece doesn't identify the type of investors that are pulling money out. You would think that muni bonds only have retail investors. Think again.
This a note from Bernstein Global Wealth Management, back in April:
| Quote: | What effect are hedge fund investors having on the
municipal market?
There’s a big contingent of leveraged investors in the municipal bond market. These investors buy long bonds and, using a trust, finance themselves in the municipal market with variable-rate demand notes. At the same time, to offset the risk of owning long-term bonds, many of these leveraged investors seek to eliminate the interest rate risk of owning long bonds by essentially selling long-term taxable bonds. But long-term municipals have significantly underperformed taxable bonds over the last year. As a result, these leveraged municipal trades are down as much as 50%, and margin calls are forcing liquidations. The outcome of this is likely to be a significant additional supply of long-maturity municipal bonds flooding the market. |
https://www.bernstein.com/publ....?cid=54188 |
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magellan
Joined: 09 Mar 2007
Posts: 979
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| Posted: Sat Sep 27, 2008 9:24 am Post subject: |
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Great post. thanks for the link!
Jim |
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Dan Kohn
Joined: 26 Jun 2007
Posts: 1504
Location: New York, NY
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| Posted: Sat Sep 27, 2008 10:04 am Post subject: Thanks |
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| That Bloomberg story is the best explanation I've yet seen for the outrageously high money market tax-exempt yields. Interesting that there is no indication how much longer it will last. |
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superlight
Joined: 31 Mar 2008
Posts: 1252
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| Posted: Sat Sep 27, 2008 10:31 am Post subject: |
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This Princeton economic discussion tallies with that pretty well:
http://www.youtube.com/watch?v=Wj_JNwNbETA
It's been sad to see my Vanguard California Intermediate Tax Free fund slip, but I hope it is a shorter term deleveraging thing, as these imply.
(I wasn't planning on buying more until year-end, by which time the situation should be less murky.)
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"Simplicity is the ultimate sophistication." |
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richard
Joined: 20 Feb 2007
Posts: 3402
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| Posted: Sat Sep 27, 2008 11:36 am Post subject: |
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| superlight wrote: | | It's been sad to see my Vanguard California Intermediate Tax Free fund slip |
Unless you're selling (or the slip is due to defaults, which is not the case here), you should be happy to see prices slip. The higher interest rate makes you better off in the long run, where long run equals the duration of the fund.
Borrowing short to invest long is a risky strategy |
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superlight
Joined: 31 Mar 2008
Posts: 1252
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| Posted: Sat Sep 27, 2008 11:58 am Post subject: |
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| richard wrote: | | superlight wrote: | | It's been sad to see my Vanguard California Intermediate Tax Free fund slip |
Unless you're selling (or the slip is due to defaults, which is not the case here), you should be happy to see prices slip. The higher interest rate makes you better off in the long run, where long run equals the duration of the fund. |
Oh sure, that's why it's only sad and not really bad. I pretty much plan to keep this holding "forever", and perhaps would double it (to 15% allocation). I guess the thing at the back of my mind is that this decline might be an efficient market predicting Muni losses. That might be bad rather than just sad. Or it might be a prediction that interest rates will climb and we'll have 7% 10 year t-bills in the next few ...
I don't know. Maybe there I'm stressing about low probability risks. And I certainly understand that a (current) 7% allocation shouldn't have too much of my attention.
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bookshot
Joined: 01 Sep 2008
Posts: 392
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| Posted: Sat Sep 27, 2008 12:00 pm Post subject: |
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| Good tax loss swap opportunity if holding munis in mutual fund, especially if single state. |
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Easy Rhino
Joined: 05 Aug 2007
Posts: 1255
Location: San Diego
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| Posted: Sat Sep 27, 2008 12:46 pm Post subject: |
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| Excellent bloomberg article, thanks. |
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Easy Rhino
Joined: 05 Aug 2007
Posts: 1255
Location: San Diego
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| Posted: Sat Sep 27, 2008 12:47 pm Post subject: |
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| bookshot wrote: | | Good tax loss swap opportunity if holding munis in mutual fund, especially if single state. |
Remember that you need to have the holding for six months before you can deduct the loss on a tax-exempt-dividend-producing security. |
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MossySF
Joined: 19 Apr 2007
Posts: 908
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| Posted: Sat Sep 27, 2008 12:56 pm Post subject: |
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| Easy Rhino wrote: | | Remember that you need to have the holding for six months before you can deduct the loss on a tax-exempt-dividend-producing security. |
The rule is avoid paying no taxes on the dividends and then taking a deduction on the loss. But if you have more losses than you have tax-exempt interest, that amount over the dividend can be TLHed.
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lando
Joined: 17 Apr 2008
Posts: 16
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| Posted: Sat Sep 27, 2008 1:25 pm Post subject: |
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| Am I understanding correctly that it may be a good time to move from the tax exempt money market fund to tax exempt bond funds? I would appreicate arguments for and against, and would one stick with the short, limited and intermediate term funds in case interest rates creep up from inflation? Thanks!! |
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Easy Rhino
Joined: 05 Aug 2007
Posts: 1255
Location: San Diego
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| Posted: Sat Sep 27, 2008 8:53 pm Post subject: |
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I have equal (and fairly small) amounts of money in muni money markets and int muni bonds (all CA).
I am enjoying the crazy high rates on the MMFs. And hating the decimation of the bond fund.
Since I don't have any special knowledge or advice, I'd make the decision for any other bond/money market decision. Money market for short term liquidity/emergency fund/etc, and bonds for longer term holdings. |
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Paladin
Joined: 03 Mar 2007
Posts: 1251
Location: California
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| Posted: Sat Sep 27, 2008 10:11 pm Post subject: |
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| bookshot wrote: | | Good tax loss swap opportunity if holding munis in mutual fund, especially if single state. |
Why especially if single state? How would you do the TLH?
Thanks. |
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