Bogleheads

indexfundfan · Joined: 20 Feb 2007 Posts: 769

Hi,

Does anyone invest in municipal resets?

I keep quite a huge chunk of cash in FSPXX (Fido CA AMT-free MMF) and VCTXX (Vanguard CA MMF). I am considering moving part of it into 7-day CA AMT-free ARS.

From my understanding, the main pro is the higher yield. The MMF yields me around 3.5% APY after AMT while I can get ~3.6% rate after AMT (APY ~3.7%), i.e. by moving into resets, I gain around 20 basis points in after tax yield.

The cons:

1. Less liquidity (if I need to liquidate on a non-reset day, I might experience a loss in principal). Also I don't have the convenience writing checks against a MMF. But a 7-day reset is a very short time that I can live with.

2. Less diversified than a MMF since a minimum of $25k is allocated to one issuer.

Anyone got any more to add?

Here is the page to municipal resets on Fidelity:

http://personal.fidelity.com/p....=obrfind30
_________________
My signature has been deleted.

stratton · Joined: 04 Mar 2007 Posts: 7897 Location: Puget Sound

Look at Fido's Tax Exempt MM funds again. They recently introduced three levels. The lowest which can be used as "core" funds has a low minimum. A higher level with $25K minimum and if you have $1 million you can use their institutional. The yield goes up ~10 or 15 basis points at each level.

http://personal.fidelity.com/p....r?refhp=cp

Paul

indexfundfan · Joined: 20 Feb 2007 Posts: 769

indexfundfan · Joined: 20 Feb 2007 Posts: 769

Some additional information on municipal resets:

http://www.indextown.com/archi....ad-of-mmf/

Hope it will be useful.
_________________
My signature has been deleted.

tfb · Joined: 19 Feb 2007 Posts: 3584

IndexFundFan,

Thanks for spreading the info. I'm all for going direct and cutting out the middleman (MMF). ER of 27 bps on Fidelity's muni MMF seems quite high. 7-day liquidity isn't a big deal. Loss of diversification is a concern. Even with $100k, you can only diversify with 4 issuers. Got to be really careful with picking the issuer. Not sure how much you can trust the AAA ratings because they are achieved by insurance. Are there GO bonds on the list?
_________________
The Finance Buff

indexfundfan · Joined: 20 Feb 2007 Posts: 769

tfb,

I also believe there is a little bit more risk. But, I think the following will mitigate that :

o If there is a downgrade in credit quality, I can get out in not more than 7 days. Defaults typically happen only following a series of downgrades and this can only happen in a much longer time period than 7 days.

o Pick issues backed by different insurers.

o According to that dolmar guy (who by the way has made many respectable posts on FWF), there has never been a default in VRS in the 20-year history.

o I believe Larry S himself is OK with using AAA municipal bonds. He has commented on several occasions that AAA municipals are many times safer than AAA corporates.

Nevertheless, I agree there is definitely an increase in risk when compared to those municipal MMFs (not corporate-paper MMF) from Vanguard or Fidelity. I would quantify the risk as "not impossible, but highly unlikely".
_________________
My signature has been deleted.

indexfundfan · Joined: 20 Feb 2007 Posts: 769

Just to correct a misconception on municipal resets.

After you purchase a reset, there is nothing more that you need to do. You do not have to manually rollover every week, i.e. no buying or selling each week. What happens every week is that you get paid and the rate resets. Of course if you want, you can put a hold-bid at a specific minimum yield but this is completely optional.

BTW, I haven't gotten in yet.
_________________
My signature has been deleted.

grok87 · Joined: 27 Feb 2007 Posts: 3365

Index-
I find these intriguing too but a bit hard to understand. For example I can't understand why the rate varies so much from issuer to issuer when they are all rated the same. Should you then go for the highest one? But maybe these somehow have more risk.
cheers
grok

penumbra · Joined: 29 Mar 2007 Posts: 47

Sometimes there's a slight advantage overMM funds, othertimes not (esp over Fidelity Institutional rates). Biggest nuisance for a West Coast person using
Fidelity is having to call in before 7am to buy, and same in order to sell. It's disruptive, and sometimes, your money is tied up at the wrong time. I eventually tired of the process. Just MM's now.

phil1ben · Joined: 28 Aug 2007 Posts: 24

I have the same question as Grok. I have jumped in to resets and I am realizing a 50 basis point increase over the Fidelity Pa Tax free money market. I am in Pa and I bought a AAA insured (AMBIC) reset yesterday paying 4.25%. This seems incredible to me. When I asked the "specialist" why the rate was so high he had no answer other than this is not a widely known retail product. That also makes no sense unless perhaps the original index tied to that particular bond remained fixed at a rate above market. I will see what it resets at next week.

Unless i am missing something assuming I buy AAA insured Resets these appear to be as safe as any muni bond. Anyone feel differently?

indexfundfan · Joined: 20 Feb 2007 Posts: 769

Phil,

Your case is particularly good because there is only the fairly crappy 'investor' class muni MMF for PA. I'm in CA and in addition to the 'investor' class MMF, there is the $25k-min and $1m-min classes.

I have made two bids so far but did not get in because my asking yield is higher than the close.
_________________
My signature has been deleted.

indexfundfan · Joined: 20 Feb 2007 Posts: 769

stratton · Joined: 04 Mar 2007 Posts: 7897 Location: Puget Sound

indexfundfan · Joined: 20 Feb 2007 Posts: 769

DaveTH · Joined: 05 Apr 2007 Posts: 2447

PowerShares has recently filed a registration for an ETF called the "Weekly VRDO Tax-Free Portfolio"

From the prospectus:
The Fund will normally invest at least 80% of its total assets in variable rate demand obligation (“VRDO”) bonds that are exempt from federal income tax with interest rates that are reset weekly
...The Fund is designed for investors who seek a relatively low-cost approach for investing in a portfolio of municipal securities in a specified index.

grok87 · Joined: 27 Feb 2007 Posts: 3365

The powershares ETF sounds good. I wonder if the other 20% will have AMT exposure though. Maybe it will cause some fund companies to lower their muni money market expense ratios...
cheers
grok

DaveTH · Joined: 05 Apr 2007 Posts: 2447

grok87 · Joined: 27 Feb 2007 Posts: 3365

stratton · Joined: 04 Mar 2007 Posts: 7897 Location: Puget Sound

grok87 · Joined: 27 Feb 2007 Posts: 3365

stratton · Joined: 04 Mar 2007 Posts: 7897 Location: Puget Sound

indexfundfan · Joined: 20 Feb 2007 Posts: 769

I started this thread so I thought I should update it.

Because of concerns with the monoline insurers credit downgrades, there have been a few municipal reset auction bond failures.

Some of the issues today are resetting at more than 10%, see link

http://www.indextown.com/archi....-failures/

I hope my OP did not bring grief to anyone.
_________________
My signature has been deleted.

grok87 · Joined: 27 Feb 2007 Posts: 3365

astroturf · Joined: 26 Aug 2007 Posts: 548 Location: Greater NYC Area

Watch out folks. This is a troubled segment of the municipal bond markets. From today's Bloomberg:

indexfundfan · Joined: 20 Feb 2007 Posts: 769

grok,

Thanks for asking. I got out in December:

http://www.indextown.com/archi....set-bonds/
_________________
My signature has been deleted.

indexfundfan · Joined: 20 Feb 2007 Posts: 769

Today, two commentators on my blog noted the locking down of the Vanguard CA TE MMF for purchase or sale at Wells Fargo's brokerage.

Perhaps this and the ARS auction failures are related... my hypothesis is that CA's TE MMF might have experienced huge inflows from money flowing out of muni ARS, and thus the lock down. Anyone think this is the reason?
_________________
My signature has been deleted.

zak42 · Joined: 01 Apr 2007 Posts: 35 Location: CA

This is what WF sent me about VCTXX today.

To place a sell order for VCTXX, you must contact us by phone anytime at 1-800-TRADERS (1-800-872-3377). Orders for VCTXX cannot currently be accepted online. For our customers' security, we cannot accept trade instructions via email.

We regret any confusion or inconvenience caused by this issue.

VANGUARD PURCHASE RESTRICTIONS

At this time, Vanguard is no longer accepting any purchase orders for VCTXX from Wells Fargo Investments. This purchase restriction applies to initial and subsequent purchases. Vanguard is currently only permitting sell orders in this specific fund.

We have been made aware that due to the volatility of the municipal bond marketplace, Vanguard Funds has elected to take certain steps to restrict the purchases of certain Tax Free Money Market Funds.

We have no estimated timeframe as to when this situation may change. To the best of our knowledge, this action on the part of Vanguard was completed without any prior communication to our firm.

We hope this information is helpful.

indexfundfan · Joined: 20 Feb 2007 Posts: 769

The result is out:

NEW YORK — Failed auctions of mostly municipal debt totaled approximately $6 billion Tuesday, with Citigroup Inc. the lead underwriter on the bulk of the sales, according to a document from the bank.

The size of the auction-rate muni market is about $250 billion.

The failed auctions Tuesday follow at least six others, sparking concerns this once-safe corner of the credit markets is the next area to crumble. When an auction fails, the holders of the securities are paid a premium until the paper can be sold.

http://www.chron.com/disp/stor....36272.html
_________________
My signature has been deleted.

cannedham · Joined: 05 Jul 2007 Posts: 214 Location: San Mateo, CA

What is a failed auction?

I am currently invested in prime MMF (emergency cash) and short term bond (housing downpayment). I have been thinking about buying tax-exempt CA MMF and bond since I'm moving to California this summer and climbing up the tax brackets once I graduate from school this year.

Are these instruments risky like corporate bonds, where you may lose a lot of your initial money, or are they risky like other MMFs, where in the catastrophic case you may lose a small amount of your principal but this rarely happens?

indexfundfan · Joined: 20 Feb 2007 Posts: 769

tfb · Joined: 19 Feb 2007 Posts: 3584

indexfundfan · Joined: 20 Feb 2007 Posts: 769

astroturf · Joined: 26 Aug 2007 Posts: 548 Location: Greater NYC Area

Spirit Rider · Joined: 02 Mar 2007 Posts: 270

They may want to refinance. However, they would be refinancing into the existing market circumstances. With all the problems of the insurers.

It is unlikey that significant portion of the ARS market could refinance in a short period of time. The market is more likely to stabilize and the rates come down to earth before many ARS could be refinanced. So while the 20% is unrealistic, high single digits is not.

This is a essentially a liquidity arbitrage situation. If you are careful and analyze the financial health of the underlying bond issuer AND understand that once in it may be an indeterminate period before you can get your money back out.

You would be better off selecting the sound municipal and state ARS where the auctions are just resetting higher, rather than failed auctions. Getting 8%-10% tax effective returns from safe issuers is certainly better than 3%-4% MM yields.

Where there are high risk adjusted returns, liquidity problems will be resolved by the market place. The hedge funds are already circleing for some arbitrage profits.

Just understand what you are getting yourself into.

astroturf · Joined: 26 Aug 2007 Posts: 548 Location: Greater NYC Area

phil1ben · Joined: 28 Aug 2007 Posts: 24

I have been in and out of these resets since this past summer. I have had a few auctions fail and each time I am somewhat ambivalent. I am not sure whether I want them to close and I get my money back (I do not need liquidity) or to fail and I get 10-18% tax free. In each instance I have called the finance director of the issuer to determine what the public entity plans to do concerning the reset and all have told me that they will either refinance with a fixed rate muni or draw on a line of credit to redeem the reset. Obviously, a large issuer can do this but an issuer like a small airport authority may not have such access to capital. I concluded to sell the resets that have underlying credit below S & P-A and to retain those of A or above. One might be surprised how many issuers are below A, particularly in these resets which are normally revenue bonds. Fortunately the two issues that I had which were BBB and BB+ sold. Although I must admit that I do not know why these sold and others having higher ratings failed.

Assuming the above is the case I am somewhat perplexed why these auctions keep failing. I would think that a hedge fund or wealthy investor would jump in at these rates even for 28 or 35 days. Does anyone have any idea?

astroturf · Joined: 26 Aug 2007 Posts: 548 Location: Greater NYC Area

indexfundfan · Joined: 20 Feb 2007 Posts: 769

Secondary market for ARS is said to start on 3/3:

http://www.reuters.com/article....9320080225

Wonder what kind of discounts we will see.
_________________
My signature has been deleted.

stratton · Joined: 04 Mar 2007 Posts: 7897 Location: Puget Sound

astroturf · Joined: 26 Aug 2007 Posts: 548 Location: Greater NYC Area

The secondary market is probably a last-ditch effort to save the auction rate "securities" market and keep those fees flowing for the dealer/brokers. I don't see how this market will continue to be attractive to high-quality issuers like municipals. Once they get burned they run for the exits, until the next new thing comes along.