Municipal Bonds - Pro's and Con's

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Swampy
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Municipal Bonds - Pro's and Con's

Post by Swampy » Thu Aug 15, 2013 9:52 pm

I am invested roughly 33% equity index funds, US and foreign; 40% bond funds, mostly short to intermediate term; and 27% in cash equivalents yielding about 0.75%. The cash equivalents alone are enough to keep my living expenses funded for at least 7 years, without having to touch anything else.

I'm beginning to think that I have too much sitting on the sidelines in cash and would like to bump up my rate of return on the cash equivalent side. I have never invested directly in municipal bond issues, but at the going rate of around 5% tax free which is paid every year, taking just 1/5th of my cash equivalents and converting to muni's would essentially more than double the return of my cash equivalents. I understand that technically muni's are not cash equivalents as they are for very long terms.

I believe that interest rates will rise, but if I invest monthly over the course of 2-3 years I should capture any rise in interest rate payouts from the muni's. I'm planning on keeping these without ever needing to sell (so technically I should be 'immune' from price decreases) and, should they be called in early, just getting into another muni bond to replace it.

Where can I find historical yields for A rated, or better, muni's?

What are the things I should beware of, such as broker's tricks, traps and misrepresentations I should detect when they talk about muni's? When should I run for the door and not look back? Is any one company better than another for quality of muni's offered, service and pricing?

Unless there are good reasons to the contrary, I will be planning on creating my own personal 'mutual fund' of municipal bonds consisting of 25-50 issues rather than buying into another bond fund which never has a maturity date.

What are the best types of issues to invest in and why? What has your success been?

Of course, if muni's work out, why wouldn't I want to invest upto 40% of my free cash equivalents over a few years? Assuming I still have a significant stockpile of cash on hand, I should remain 'immune' to price fluctuations if these are held to maturity.

I am looking forward to your wisdom, insight and experience.
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Re: Municipal Bonds - Pro's and Con's

Post by LadyGeek » Thu Aug 15, 2013 10:17 pm

A few "beware of" points:
Be sure that you don't mix the risks of stocks with those of bonds. Munis have characteristics which exhibit returns like stocks, but they are not stocks. Take a look at this thread: know the data before buying HY bonds. The last paragraph of the article is important, and the linked article: Why junk bonds aren't a good portfolio fit.

Also, this thread: An analysis my colleague did on high yield, and the wiki: High Yield Bonds

The bottom line is that if you want to take equity-like risk, do it with small cap stocks.
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stlutz
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Re: Municipal Bonds - Pro's and Con's

Post by stlutz » Thu Aug 15, 2013 11:12 pm

...at the going rate of around 5% tax free which is paid every year
Where did you get the idea that the "going rate" on munis rated A or above is 5%? To get that kind of yield you either have to take a lot of credit risk or a lot of duration risk. An easier way to take some risk would be to simply invest your cash in a mix of stock and bond funds.

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Re: Municipal Bonds - Pro's and Con's

Post by mrpotatoheadsays » Thu Aug 15, 2013 11:58 pm

Swampy wrote:at the going rate of around 5% tax free
10-year A-rated munis currently yield ~3.05%.
Swampy wrote:they are for very long terms.
Incorrect. There are short-term munis also.
Swampy wrote:Where can I find historical yields for A rated, or better, muni's?
Bondsonline
Swampy wrote:What are the things I should beware of
The non-treasury bond market has historically been associated with little transparency. By the time you get the bond in your hand, several mIddle-men will have taken their cut.
Swampy wrote:Unless there are good reasons to the contrary, I will be planning on creating my own personal 'mutual fund'
To quote Betty White, "It sounds like a huge waste of time."
Swampy wrote:What has your success been?
Historically, since the US went off the gold standard, a diversified portfolio of Treasury bonds and bills have just barely kept ahead of inflation. Since munis have higher-risk, over the long term, they should return a slight better, albeit poor, results. You just can't win with bonds.
Swampy wrote:I should remain 'immune' to price fluctuations if these are held to maturity.
"If" you can hold on to them until maturity. Life happens: illness, fire, tornados, lawsuits, a new roof... etc etc.

reason-logic
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Re: Municipal Bonds - Pro's and Con's

Post by reason-logic » Fri Aug 16, 2013 12:32 am

I have invested significant amounts into individual muni's. I have built a ladder of bonds with an average maturity of 5 years. You can purchase bonds on the secondary market through Vanguard Brokerage service. I recommend you screen for bonds that are insured, are at least A rated and diversify, diversify, diversify. Do not put more than 5% with any one issuer. be sure you understand the implication of calls and sinking funds which are common with Munis. Also be sure you understand your tax rate and the after tax yield equivalent vs other fixed income assets. Munis have been yielding much higher than Treasuries for a while, plus they are tax free (most of them anyway).

I like to buy and hold individual bonds as opposed to a bond fund which never matures.

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Re: Municipal Bonds - Pro's and Con's

Post by Swampy » Fri Aug 16, 2013 5:18 am

the going rate of around 5% tax free
That number came from what a couple of unassociated brokers told me recently. They stated it had been 4% until recently when the muni's 'popped' to around 5%.

I attended a sales pitch at a local eatery, going in to it fully skeptical. After doing that, I decided to study the matter further and called another independent broker. This broker blew it on the first call when they advised I get into a mutual fund with C class shares. Despite my telling them I did not want to go that way because of no specific maturity date and I wanted to avoid the management fee's, they just kept droning on and on.

So, I have several choices:

1. Do I continue to seek out a reputable broker that won't take advantage of a dumb newbie who deals with muni's (I didn't trust the first two)? Who would you recommend?

2. Do I decrease my cash equivalent holdings from 27% to 10-12% (which would give me about a 3 year buffer of cash) and invest the rest divided between the index and bond funds currently held?

3. Do I do nothing for a year or two and leave things as they are (on autopilot) and continue to study and watch for other opportunities that may arise?

4. I'm open to other ideas and options.

I suppose the best thing I could do is just bide my time and invest during market corrections.

That, or spend it on wine, women and song.
I spent 90% of my money on women and drink. The rest I just wasted.
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Re: Municipal Bonds - Pro's and Con's

Post by Call_Me_Op » Fri Aug 16, 2013 6:51 am

Fidelity has some muni funds with fixed maturity dates.

I am not fond of the idea of a muni ladder. You need many bonds to be properly diversified and after fees, you are probably better off with a fund. Plus, it's a lot of work to deal with the number of bonds you need to be well diversified.

The other issue with muni's is that while you think you may do better than treasuries of similar maturity, in the context of a diversified total-return portfolio, you may actually have better returns with treasuries. That has certainly been the case historically.

I would probably have a different opinion if your name were Larry Swedroe.
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Sidney
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Re: Municipal Bonds - Pro's and Con's

Post by Sidney » Fri Aug 16, 2013 7:46 am

You have to buy a lot of them to get the diversification you get with funds. For me, the ER of the admiral funds is worth it for diversification and liquidity. Plus, I am lazy. Building and maintaining a muni bond portfolio is a lot of work.
I always wanted to be a procrastinator.

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Re: Municipal Bonds - Pro's and Con's

Post by Spirit Rider » Fri Aug 16, 2013 8:01 am

When you are talking about muni yields you have to define what you are reporting. There is the raw yield and then there is the taxable equivalent yield, which increases the higher your marginal tax rates are. After all, that is the whole point. Check my math, but they can be very beneficial for higher wage earners.

Consider CA marginal tax rates married/joint $60K, 15% Federal + 6.0% state = 21%, 3% raw = 3.80% tax equivalent.
Consider CA marginal tax rates married/joint $150K, 28% Federal + 9.3% state = 37.3%, 3% raw = 4.78% tax equivalent.
Consider CA marginal tax rates married/joint $250K, 33% Federal + 9.3% state + 3.8% Medicare = 46.1, 3% raw = 5.57% tax equivalent.
Consider CA marginal tax rates married/joint $1M, 39.6% Federal + 13.3% state + 3.8% Medicare = 56.7, 3% raw = 6.93% tax equivalent.

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Re: Municipal Bonds - Pro's and Con's

Post by jdb » Fri Aug 16, 2013 8:59 am

Like reason-logic I am an outlier on this site by maintaining a small lot diversified muni bond ladder. But do not recommend my do it yourself method unless have sufficient assets to build diversified ladder (suggest at least $500K) and willing to learn a lot first by reading Larry Swedroe bond books and then learning EMMA and being able to figure out when to hold and when to fold and what to avoid at all costs. Also need to be able to hold all bonds until maturity or redemption since large markups by dealers when selling small lots. Best advice for most investors is stick with Vanguard muni bond funds, probably get just as good a return as my ladder without the hassle (but also without the fun of the hunt).

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tigerman3
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Re: Municipal Bonds - Pro's and Con's

Post by tigerman3 » Fri Aug 16, 2013 10:25 am

I too have a portion of my bond allocation in a muni ladder. Schwab has a product offered through PIMCO. PIMCO buys the bonds, manages the ladder (either 6 years or 12 years ladder) and takes a small management fee (.25). Because it is a managed account, no commission is taken on the bond purchases (which makes it more transparent on my end). See http://www.schwab.com/public/schwab/inv ... xed_income

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Re: Municipal Bonds - Pro's and Con's

Post by abuss368 » Fri Aug 16, 2013 10:37 am

We invest in the Vanguard Intermediate Term Tax Exempt Bond fund with Total Bond Index fund in tax advantage. This fund is very diversified, low cost, tax friendly, easy to understand and manage, and best of all simple. You may be able to do better but you can easily do alot worse.

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Re: Municipal Bonds - Pro's and Con's

Post by Wricha » Fri Aug 16, 2013 5:00 pm

2 cents here. I own a large number of individual Muni's for 10+ years. Bought high quality, long term, bonds with a yield of 5% most of these bonds are still above issue price, always paid on time, no defaults so I am happy. They have lost their quality ratings most were AA or higher now most are below but still above A. Just bought a slug of them recently and got 5.25% for A rated or better( no CA, MI, IL or PR and no healthcare) . Used Zion Direct and saved on price, yield and commission over the life of the bond as high as 7% and they have a large inventory (plus they allow $5k purchase) Have not used but another boglehead claimed Schwab has similar rates and inventory. I think Detroit may have caused the market to over react to muni's but 5.25% tax free yield is ok by me. Once you buy managing them in my opinion is minimal.

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Re: Municipal Bonds - Pro's and Con's

Post by stlutz » Fri Aug 16, 2013 5:31 pm

1. Do I continue to seek out a reputable broker that won't take advantage of a dumb newbie who deals with muni's (I didn't trust the first two)? Who would you recommend?
You can search for the muni bonds that are available in Fidelty's inventory without opening an account. They offer a broad inventory, so that would give you a sense of what is actually available out there without having to rely on what somebody tells you.

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Artsdoctor
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Re: Municipal Bonds - Pro's and Con's

Post by Artsdoctor » Fri Aug 16, 2013 7:37 pm

If you're really interested in buying individual munis, you really want to understand what you're doing. There are many, many questions you'll need to answer but you might want to start with (1) do you want to buy them at issue or on the secondary market? (2) what ratings do you require? (3) how far out do you want to go on maturity?

If you don't know what you're doing, be aware that buying on the secondary market can carry a big price tag. You will need to research what price that bond fetched recently (there are a few sites, including EMMA) in order to assure yourself that you're not being taken advantage of. There is just too high of a mark-up for an unsuspecting investor (potentially a year's worth of income, or the like). You need to make sure that you're getting a fair price; don't just click on a bond on a website; you should speak with a broker.

If you want to limit your credit risk, stay with only AAA or AA bonds. Then, you'll have to figure out how the issuer is going to pay you. General obligation, schools, hospitals, whatever? Is the rating on the issuer's terms or are the bonds insured? If they're insured, when was the insurance issued (pre or post 2009)?

Then, you'll have to decide on maturity. Sure, you can find high yielding, good quality bonds, but you'll have to extend your maturity out many years to do it. It's good advice for anyone, but for a new investor, you'd want to stay short or intermediate at most.

And if you're going to buy on the secondary market, beware of how they calculate YTM. YTM might allow you to compare different bonds, but there's are really, really good chance that YOU won't get the YTM that's quoted.

If you're aware of all of the above and there's nothing perplexing go for it. If you don't understand the above, I would really recommend that you read "The Bond Book" by Annette Thau. It'll give you the information you need to proceed.

For the small investor, buying individual munis is usually not worth it. If you really want to try it, I'd recommend new issues only, AAA or AA quality, and short to intermediate term.

Artsdoctor

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Re: Municipal Bonds - Pro's and Con's

Post by Biil McNeal » Sat Aug 17, 2013 1:25 am

Artsdoctor wrote: For the small investor, buying individual munis is usually not worth it. If you really want to try it, I'd recommend new issues only, AAA or AA quality, and short to intermediate term.

Artsdoctor

What is your definition of "small?" Less than $500,000?

Also, what is the advantage of individual munis vs. a muni fund? Seems the fund wins hands down for diversification.

I have some shares In an intermediate term muni fund and am interested in a long term muni fund for diversification. Has the Fed taper already been priced in, or will that trigger another big drop in munis?

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Re: Municipal Bonds - Pro's and Con's

Post by Trurl Klapaucius » Sat Aug 17, 2013 9:30 am

Biil McNeal wrote:
Also, what is the advantage of individual munis vs. a muni fund? Seems the fund wins hands down for diversification.
Regarding the advantages & disadvantages of holding a municipal bond fund vs an individual muni bond ladder, here is a link to a discussion: http://www.bogleheads.org/forum/viewtop ... 0&t=110551

I believe that the diversification benefit of mutual funds is overstated for two reasons:

1) Many of the bonds in a fund are insured by the same companies, and therefore share a common credit risk; i.e., that of the insurance company.

2) The number of bonds a fund reports that it holds usually includes many issues from the same municipality, and these “duplicates” share the same credit risk; i.e., that of the common municipality.

For both of these reasons, muni bond funds are less diversified than they seem simply by reviewing the number of bonds they hold. Their holdings may have covariant, not independent, risk factors. This problem can more easily be managed if you are constructing your own bond ladder than if you are buying funds. Simply don’t buy many bonds that have insurance from the same provider, or that are issued by the same municipality.

- Trurl

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Re: Municipal Bonds - Pro's and Con's

Post by Artsdoctor » Sat Aug 17, 2013 11:47 am

Biil McNeal wrote:
Artsdoctor wrote: For the small investor, buying individual munis is usually not worth it. If you really want to try it, I'd recommend new issues only, AAA or AA quality, and short to intermediate term.

Artsdoctor

What is your definition of "small?" Less than $500,000?

Also, what is the advantage of individual munis vs. a muni fund? Seems the fund wins hands down for diversification.

I have some shares In an intermediate term muni fund and am interested in a long term muni fund for diversification. Has the Fed taper already been priced in, or will that trigger another big drop in munis?
The definition of "small" is certainly subjective and I'm not a broker. Like anything else, you will want diversification. There would be nothing wrong with having both funds and individual munis while you "practice." From what I understand from reading and speaking with brokers, munis on the secondary market are sold in blocks of $25,000-$50,000 but usually much more. If you're in the 25-50K range, the broker's essentially doing you a favor and you risk them "punishing the coupon." The mark-ups are just too much with small lots and you can see that on EMMA. So at the very minimum, if you want to ultimately build a portfolio of individual munis, you'd want at least $500,000 to work with. But all of that said, if you buy at issue and commit to holding the bond until it matures, you can dabble in much smaller sums because no one's taking advantage of you. However, if you ever want to sell that small lot, you will be punished for it.

One of the benefits of holding individual munis is the ability to swap them. Meaning, you can tax-loss harvest when you want. Again, if it's a small lot, you will almost certainly sell at a much lower price than if you're selling a large lot.

Additionally, if there's a large market sell-off, the fund will be forced to redeem bonds at inopportune times. The individual muni can simply ride out the storm with the owner selling whenever she pleases.

Conversely, a fund offers flexibility and the ability to buy and sell anytime you'd like. Take a look at the make-up of the fund; you'll see a huge number of issues.

I think it's fair to say that there are pros and cons to both. However, if you don't know what you're doing buying individuals on the secondary market, you will almost certainly be taken advantage of. Take a look at EMMA; you'll see the difference that buyers pay on any given day for the same bond. It can be sobering.

Artsdoctor

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Re: Municipal Bonds - Pro's and Con's

Post by linuxizer » Sat Aug 17, 2013 12:06 pm

trurl wrote:1) Many of the bonds in a fund are insured by the same companies, and therefore share a common credit risk; i.e., that of the insurance company.
That's an argument *for* a fund, not against.

What you're saying is that bond insurance isn't worth as much as people think it is--in other words, you need the raw diversification that comes with holding hundreds of different issues, vs. relying on insurance to bail you out if a few of your ~20 bonds goes kaput.

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Artsdoctor
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Re: Municipal Bonds - Pro's and Con's

Post by Artsdoctor » Sat Aug 17, 2013 4:59 pm

Trurl Klapaucius wrote:
Biil McNeal wrote:
Also, what is the advantage of individual munis vs. a muni fund? Seems the fund wins hands down for diversification.
Regarding the advantages & disadvantages of holding a municipal bond fund vs an individual muni bond ladder, here is a link to a discussion: http://www.bogleheads.org/forum/viewtop ... 0&t=110551

I believe that the diversification benefit of mutual funds is overstated for two reasons:

1) Many of the bonds in a fund are insured by the same companies, and therefore share a common credit risk; i.e., that of the insurance company.

2) The number of bonds a fund reports that it holds usually includes many issues from the same municipality, and these “duplicates” share the same credit risk; i.e., that of the common municipality.

For both of these reasons, muni bond funds are less diversified than they seem simply by reviewing the number of bonds they hold. Their holdings may have covariant, not independent, risk factors. This problem can more easily be managed if you are constructing your own bond ladder than if you are buying funds. Simply don’t buy many bonds that have insurance from the same provider, or that are issued by the same municipality.

- Trurl
Trurl,

Actually, it is more complex than that.

When it comes to insurance, it turns out that fewer bonds are insured than you might think. The insurance meltdown that occurred after the 2007 crisis changed the way insurance is viewed (and obviously, some of the previous insurance firms are no more). So although insured bonds may have been more frequently seen previously, that it is not the case now. Also, most insured bonds are going to have an underlying rating anyway (meaning, without the insurance). That's where the expertise of the bond managers come into play.

And when it comes to municipalities, the same municipality may have different ratings for a particular type of bond. General obligation bonds from a good issuer will usually have a higher rating than a revenue bond. There may be added levels of security (pre-refunded bonds, bond banks, etc.) as well for a particular issue--but not for another. So the credit risk can vary. And obviously, the longer out you get, the more credit risk you assume since there's plenty of time for a downgrade in a 30-year time span, and much less likely in a 5-year span. All from the same municipality.

Artsdoctor

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Re: Municipal Bonds - Pro's and Con's

Post by jdb » Sat Aug 17, 2013 6:49 pm

Artsdoctor wrote: The definition of "small" is certainly subjective and I'm not a broker. Like anything else, you will want diversification. There would be nothing wrong with having both funds and individual munis while you "practice." From what I understand from reading and speaking with brokers, munis on the secondary market are sold in blocks of $25,000-$50,000 but usually much more. If you're in the 25-50K range, the broker's essentially doing you a favor and you risk them "punishing the coupon." The mark-ups are just too much with small lots and you can see that on EMMA.

All good points. But one clarification. My experience is that muni bond brokers prefer to deal with at least 25 bonds at a time. But for a DIY the small lots in secondary market on BondDesk (which is on Vanguard Brokerage Platform and others) are between 5 and 25 bonds. Most of my purchases are between 5 and 15 bonds and rarely exceed 25.

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Re: Municipal Bonds - Pro's and Con's

Post by Artsdoctor » Sun Aug 18, 2013 9:42 am

JDB,

Those are tiny lots. You are almost certainly paying too much for your bond if you're buying it on the secondary market and if you're selling it, you are not getting a good price for the sale. The lack of transparency used to be a big criticism of the secondary muni market. However, you can do a little research to find out how much others may be buying and selling the bond for. The gold standard is EMMA.msrb.org but also try investinginbonds.com. On Fidelity's website, they will sometimes publish recent purchases and sales information as well (less than half the time, though). If you don't know what's fair, you'll be shooting in the dark.

You cannot rely on the YTM for an exact calculation. It is a good figure to compare bonds on the secondary market but your real life experience will be different. The YTM that you're seeing on your screen supposes that you'll hold your bond until maturity, that the coupons are reinvested somewhere, and that that somewhere's rate is the same rate as the stated YTM. In real life, this is never the case.

Right now, a high-quality intermediate muni with a maturity of 5 years might yield 2-2.5%, for example. With a small lot, your mark-up (if purchased on the secondary market) may be that amount (compared to what another larger investor is paying). That's a whole year in dividends that you're paying. And if you sell, who's going to want to buy a $5,000 lot? You will be "punished" by selling at another suboptimal price. You won't know this, of course, because they won't tell you (mark-ups are different than commissions and are usually not publicized); but nowadays there is a public record of prices so you can at least try and make an informed decision.

If you really can start buying in larger lots, there's nothing wrong with calling the bond desk and asking if they can do better than the price published. If you have your EMMA data, it might be worth it. I doubt any broker is going to negotiate for a $5,000 lot. (There are several ways to buy your bonds, of course: full-service broker, online broker, discount broker, etc.; the way they sell their bonds and the way they make their living will vary.)

Full disclosure: I use the CA muni fund at Vanguard because I feel more comfortable with the managers at Vanguard picking CA bonds (I love my state but I need the diversification of the fund because of credit issues). However, I'll venture out to other states to buy individuals BUT only AAA or AAs, keeping them short to intermediate, I do my research, and I'll try to talk to the bond desk. I also read the prospectus and try to figure out who's responsible for paying me and how likely they are to do so. I buy the bond with the assumption that I'll hold it until maturity since I'm skeptical I'll get a good price at an early sale. I will always try to buy a new issue although that can be hard. I don't shy away from premium bonds because the coupon may be higher relative to a discount bond (though not always), and I'll reinvest the dividends in a stock fund to hopefully goose total return (and you don't pay the capital gain when the note matures). I never just click on a button when buying on the secondary market. It is work, at least to me.

Artsdoctor

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Re: Municipal Bonds - Pro's and Con's

Post by spyman » Sun Aug 18, 2013 11:17 am

I've invested in a muni bond ladder via Fidelity which uses Breckenridge as the manager. The minimum initial investment is $1,000,000 and the fee is 35 basis points. I have no discretion in how they structure the ladder but they are buying bonds as long as 11 years out with an average duration of 6 years. They typically buy in 50k lots. Because of the volume that Breckenridge does does and their expertise (they only invest in municipal bonds), I'm comfortable that they are getting competitive pricing when buying/selling and doing a good job of evaluating for credit risk. The problem with a muni bond ladder is that it is very difficult to exit or reduce exposure in the future. To have diversification and a decent return, you need to have a sufficiently large number of bonds and replace the maturing bonds with new ones. But what if I decide that I have too much allocated to muni bonds and want to reduce my exposure? There is no easy way to do this without hurting diversification and return, especially since my current longer-term bonds (9-11 yrs out) are at very low rates. I feel stuck in the muni bond ladder. In hindsight, I wish I had chosen a bond fund.

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Re: Municipal Bonds - Pro's and Con's

Post by Artsdoctor » Sun Aug 18, 2013 11:33 am

Spyman,

Excellent synopsis. I also feel somewhat trapped but in a different way. I have to put fixed income somewhere in my taxable account and it makes no sense whatsoever to do anything but munis. I love the flexibility of a fund and that is where I have much of my muni assets. Nonetheless, I also like the ability to buy individuals but stick to Larry's mantra totally: safety, safety, safety. I am willing to give up yield for safety (I won't usually even look at individuals rated A and I won't go long no matter how tempting). That's the only way I feel comfortable. So although I don't like the time I have to spend researching each bond purchase, I have gotten used to it and it's just part of investing. I also view it as a learning experience because I'm sure I will be purchasing more and more individuals over the years ahead and you have start somewhere. The only way I'd consider building a huge portfolio of individual bonds is going with a full-service firm who can get great prices, a large selection, and sell in large chunks assuring great prices as well (for TLH). That usually requires turning over the whole portfolio and I'm not quite ready to do that.

However, at the first sign of dementia, I have a couple of numbers of speed dial and written into my IPS!

Artsdoctor

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Re: Municipal Bonds - Pro's and Con's

Post by stlutz » Sun Aug 18, 2013 11:40 am

the small lots in secondary market on BondDesk (which is on Vanguard Brokerage Platform and others) are between 5 and 25 bonds
BTW, Vanguard switched to using TradeWeb instead of BondDesk. I mention that only to point out that pricing differs between different brokers. Look up a particular bond on Vanguard, Schwab, Fidelity, and E*Trade and you may well get 4 different prices. None of the 4 would ever always be the best.

In the small-lot muni space there are good deals to be found usually because a seller desperately wanted to unload a bond and got a bad price doing so. That usually means a buyer can get good price on that bond. Finding these involves investing the time to find them and know the different between a good deal and a bond that is simply more risky than its credit rating would indicate.

I just go with the fund myself.

jdb
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Re: Municipal Bonds - Pro's and Con's

Post by jdb » Sun Aug 18, 2013 2:47 pm

stlutz wrote:

In the small-lot muni space there are good deals to be found usually because a seller desperately wanted to unload a bond and got a bad price doing so. That usually means a buyer can get good price on that bond. Finding these involves investing the time to find them and know the different between a good deal and a bond that is simply more risky than its credit rating would .
Exactly. With patience there are seeming distress small lot sales on regular basis. Almost all my purchases are below prevailing price point even with markup. And intend to hold every bond till maturity or redemption.

jdb
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Re: Municipal Bonds - Pro's and Con's

Post by jdb » Sun Aug 18, 2013 6:16 pm

Artsdoctor wrote:JDB,

Those are tiny lots. You are almost certainly paying too much for your bond if you're buying it on the secondary market and if you're selling it, you are not getting a good price for the sale. The lack of transparency used to be a big criticism of the secondary muni market. However, you can do a little research to find out how much others may be buying and selling the bond for. The gold standard is EMMA.msrb.org but also try investinginbonds.com. On Fidelity's website, they will sometimes publish recent purchases and sales information as well (less than half the time, though). If you don't know what's fair, you'll be shooting in the dark.

You cannot rely on the YTM for an exact calculation. It is a good figure to compare bonds on the secondary market but your real life experience will be different. The YTM that you're seeing on your screen supposes that you'll hold your bond until maturity, that the coupons are reinvested somewhere, and that that somewhere's rate is the same rate as the stated YTM. In real life, this is never the case.

Right now, a high-quality intermediate muni with a maturity of 5 years might yield 2-2.5%, for example. With a small lot, your mark-up (if purchased on the secondary market) may be that amount (compared to what another larger investor is paying). That's a whole year in dividends that you're paying. And if you sell, who's going to want to buy a $5,000 lot? You will be "punished" by selling at another suboptimal price. You won't know this, of course, because they won't tell you (mark-ups are different than commissions and are usually not publicized); but nowadays there is a public record of prices so you can at least try and make an informed decision.

If you really can start buying in larger lots, there's nothing wrong with calling the bond desk and asking if they can do better than the price published. If you have your EMMA data, it might be worth it. I doubt any broker is going to negotiate for a $5,000 lot. (There are several ways to buy your bonds, of course: full-service broker, online broker, discount broker, etc.; the way they sell their bonds and the way they make their living will vary.)



Artsdoctor
Appreciate the concern but don't worry about me being taken advantage of in muni bond market. Been buying and replenishing small lot muni bond ladder since 2007, now have issues from 47 states (still looking for Delaware, Arkansas and Utah). Past several weeks have purchased five different investment grade small lots aggregating about 75 bonds with tax free yields between 2.4 and 3.4 percent for durations of six years non callable, all seeming distress sales below prevailing price points. EMMA is my friend and of course not only check historical prices and any credit downgrades and both sale price and markup on bond being offered but also review prospectuses. And intend to hold each bond till maturity or redemption.
Last edited by jdb on Sun Aug 18, 2013 7:53 pm, edited 1 time in total.

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Re: Municipal Bonds - Pro's and Con's

Post by Artsdoctor » Sun Aug 18, 2013 7:46 pm

JDB,

Clearly, there's no reason for me to be concerned for you. But Delaware, a true AAA of the AAAs, is out there! I believe I just saw some GOs on the Fido website but I could be mistaken. But with 49 plus Delaware, are you saying you're actively avoiding DC and PR??? :D

Best wishes in this treacherous fixed income environment. :beer

Artsdoctor

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Re: Municipal Bonds - Pro's and Con's

Post by jdb » Sun Aug 18, 2013 8:00 pm

Artsdoctor wrote:JDB,

Clearly, there's no reason for me to be concerned for you. But Delaware, a true AAA of the AAAs, is out there! I believe I just saw some GOs on the Fido website but I could be mistaken. But with 49 plus Delaware, are you saying you're actively avoiding DC and PR??? :D

Best wishes in this treacherous fixed income environment. :beer

Artsdoctor
Actually reviewed portfolio after sending message and had to also list Arkansas and Utah as missing. Did have an Arkansas issue but it was redeemed. Yes, I stick with the 50 states, no disrespect intended to P.R. and D.C. And I actually buy very little AAA, prefer to go down credit ladder to get better yields while staying with investment grade. Thanks for your comments and good luck to you in your investments.

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