Selling municipal bonds before maturity

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delamer
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Selling municipal bonds before maturity

Post by delamer »

I have just inherited several individual municipal bonds. They mature from late this year through 2022, and pay interest ranging from 2.1% to 3.5%. None of them are for municipalities in my state.

During a very brief conversation with the financial advisor who managed the total portfolio that I inherited (the bonds are about 25% of the total value), he recommended hanging onto the bonds until maturity with the argument that "it would be expensive to sell them now." The entire portfolio is in taxable accounts.

I am not sure what he meant by expensive. Are transaction costs high for selling bonds before maturity? Maybe the bonds could be worth less than their par value (assuming interest rates have risen since they were purchased)?

This advisor is not going to continue to manage the portfolio (which he knows), so the bonds would need to be transferred to a brokerage account in my name. I don't have any interest in keeping the bonds because they don't fit into my short-term plans or my long-term asset allocation, so my first instinct is to liquidate them.

I will be having further conversations with the advisor, and I would appreciate any advice so I can talk intelligently to him and make a good decision. FYI, there are some inherited mutual funds and individual stocks that I will be moving to the brokerage account, regardless of what I decide regarding the bonds.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
BarbK
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Re: Selling municipal bonds before maturity

Post by BarbK »

I've bought Muni Bonds directly from ZionsDirect.com; They were $10 to buy/sell.

I've bought Muni Bonds directly from Scottrade.com and the fees were imbedded in the price.

I've never sold; they either get called or mature.
Those rates are really low so I assume they are the yield on the appreciated bond, not the bond's yield.
Muni bond prices are very high.

---
If it were me, I would just keep the one maturing in the next couple of years and let them mature.
For the longer held bonds (>2019), it depends on how much $ whether or not I would bother to sell.

You could transfer the bonds and just hold them in the new brokerage.
el47
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Re: Selling municipal bonds before maturity

Post by el47 »

I'm not sure what the advisor meant by "expensive" either.

Here's my quick advice when selling those individual munis:

1) Check with your brokerage firm to see if they allow you to request bids on your bonds. If so, submit bid requests on the bonds. Once you receive the bids, you can determine whether or not you want to let them go at those particular prices. Look up the CUSIP of the bonds on emma.msrb.org to view past trading activity on your bonds to see if the bids you received were decent.

2) Check with your brokerage about trading fees. They will likely either embed the transaction cost into the bid that they present you or charge a separate transaction fee.

Without knowing any details about the bonds, I agree with BarbK's advice to hold the near-term bonds to maturity. Hard to advise on the longer bonds without more info.
Geologist
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Re: Selling municipal bonds before maturity

Post by Geologist »

The nominal commission is not the issue with selling municipal bonds. The issue is the markup, especially for small lots. Dealers don't like to buy small lots (I'm assuming here that your face value for each bond is not high) and often will not offer a good price. Annette Thau in The Bond Book describes this as "punishing the coupon."
Topic Author
delamer
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Re: Selling municipal bonds before maturity

Post by delamer »

Geologist wrote:The nominal commission is not the issue with selling municipal bonds. The issue is the markup, especially for small lots. Dealers don't like to buy small lots (I'm assuming here that your face value for each bond is not high) and often will not offer a good price. Annette Thau in The Bond Book describes this as "punishing the coupon."
Face value is $10,000 to $50,000. I assume these are small amounts in the bond market?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
jdb
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Re: Selling municipal bonds before maturity

Post by jdb »

Those are known as odd lots or small lots, higher markups for selling. What you have is small muni bond portfolio maturing over next 6 years with tax free returns which look good in today's low rate environment. For a number of years I was building muni bond ladder by actively purchasing odd lots when found substantial discounts from market, sometimes almost would feel sorry for the unknown seller who whether from ignorance or economic distress or most likely predatory broker was selling at discount. Don't trust the market making brokers as to odd lot sales. Unless you have to have the money for other purposes suggest holding to maturity. Some may also be redeemed early depending on the issues. Your ex advisor sounds intelligent.
Geologist
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Re: Selling municipal bonds before maturity

Post by Geologist »

Thau describes $25,000 or less as a small lot and discusses some wide spreads she had in getting quotes on a par value of $40,000. Her description is that dealers worry they'll have trouble finding a buyer to take small lots off their hands.

As another poster has mentioned, you can see something about recent trades for your bonds online. Some bonds, I gather, rarely trade.
Topic Author
delamer
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Re: Selling municipal bonds before maturity

Post by delamer »

Many thanks for all the information, everyone.

Fortunately, I do not need access to the funds tied up in the bonds in the short run so I could hang onto them until maturity. I would revise my tentative plan for handling the other assets in the inheritance if I decide to keep the bonds.

Two more questions:

1. Other than the small/odd lots issue, are there any other factors that tend to increase the markup?

2. If I hold the bonds to maturity, does the issuer simply send me a check (either paper or electronic) at the maturity date? Or is there some action that I have to take to get my money?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
jdb
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Re: Selling municipal bonds before maturity

Post by jdb »

delamer wrote:Many thanks for all the information, everyone.

Fortunately, I do not need access to the funds tied up in the bonds in the short run so I could hang onto them until maturity. I would revise my tentative plan for handling the other assets in the inheritance if I decide to keep the bonds.

Two more questions:

1. Other than the small/odd lots issue, are there any other factors that tend to increase the markup?

2. If I hold the bonds to maturity, does the issuer simply send me a check (either paper or electronic) at the maturity date? Or is there some action that I have to take to get my money?
There are far more experienced bond investors on this site than me but my responses as follows:
1. If you were a sophisticated bond investor with knowledge of market then only issue is small size of bonds being sold. Or if you had advisor you could trust. But in absence of those factors you also run risk of being taken advantage of as to price itself by broker in order to facilitate quick sale.
2. Yes. Of course, should be electronically transmitted on whatever platform you hold the bond investment.
Good luck.
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Rainier
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Re: Selling municipal bonds before maturity

Post by Rainier »

I would hold them, the coupons are likely far above the market rate.

Very likely you will get a poor price if you sell them.
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patrick013
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Re: Selling municipal bonds before maturity

Post by patrick013 »

It's a good time to sell bonds. Many muni's are selling at sizable
premiums. Perhaps sell a few and invest the cash into something
with a higher tax adjusted YTM with the captured principal.
age in bonds, buy-and-hold, 10 year business cycle
el47
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Re: Selling municipal bonds before maturity

Post by el47 »

delamer wrote: 1. Other than the small/odd lots issue, are there any other factors that tend to increase the markup?
Other factors include the quality and general demand for the bonds. There will likely be a lower markup for a safe pre-refunded bond or widely-known/held California General Obligation bond vs a Small Town USA hospital bond.

It is a good time to sell the bonds now because yields have come down. Since you stated in your original post that you have no interest in keeping the bonds nor do they fit in your plan & allocation, hold the short ones till maturity and sell the longer ones as long as you get decent bids.
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HueyLD
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Re: Selling municipal bonds before maturity

Post by HueyLD »

patrick013 wrote:It's a good time to sell bonds. Many muni's are selling at sizable premiums. Perhaps sell a few and invest the cash into something with a higher tax adjusted YTM with the captured principal.
+1.
Topic Author
delamer
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Re: Selling municipal bonds before maturity

Post by delamer »

el47 wrote:
delamer wrote: 1. Other than the small/odd lots issue, are there any other factors that tend to increase the markup?
Other factors include the quality and general demand for the bonds. There will likely be a lower markup for a safe pre-refunded bond or widely-known/held California General Obligation bond vs a Small Town USA hospital bond.

It is a good time to sell the bonds now because yields have come down. Since you stated in your original post that you have no interest in keeping the bonds nor do they fit in your plan & allocation, hold the short ones till maturity and sell the longer ones as long as you get decent bids.
Maybe a difficult question to answer, but...

For example, one bond is $25,000 par value, matures in 2021, interest rate 2.5%. What range would be decent?

Thanks so much.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Longdog
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Re: Selling municipal bonds before maturity

Post by Longdog »

delamer wrote:
el47 wrote:
delamer wrote: 1. Other than the small/odd lots issue, are there any other factors that tend to increase the markup?
Other factors include the quality and general demand for the bonds. There will likely be a lower markup for a safe pre-refunded bond or widely-known/held California General Obligation bond vs a Small Town USA hospital bond.

It is a good time to sell the bonds now because yields have come down. Since you stated in your original post that you have no interest in keeping the bonds nor do they fit in your plan & allocation, hold the short ones till maturity and sell the longer ones as long as you get decent bids.
Maybe a difficult question to answer, but...

For example, one bond is $25,000 par value, matures in 2021, interest rate 2.5%. What range would be decent?

Thanks so much.
All municipal bonds have an identifier called a CUSIP. You can go to emma.msrb.org and enter the CUSIP to see all trades on the bond. Recent trades marked "Customer Sold" will give you an idea of what to expect if you were to solicit a bid.
Steve
Topic Author
delamer
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Re: Selling municipal bonds before maturity

Post by delamer »

Longdog wrote:
delamer wrote:
el47 wrote:
delamer wrote: 1. Other than the small/odd lots issue, are there any other factors that tend to increase the markup?
Other factors include the quality and general demand for the bonds. There will likely be a lower markup for a safe pre-refunded bond or widely-known/held California General Obligation bond vs a Small Town USA hospital bond.

It is a good time to sell the bonds now because yields have come down. Since you stated in your original post that you have no interest in keeping the bonds nor do they fit in your plan & allocation, hold the short ones till maturity and sell the longer ones as long as you get decent bids.
Maybe a difficult question to answer, but...

For example, one bond is $25,000 par value, matures in 2021, interest rate 2.5%. What range would be decent?

Thanks so much.
All municipal bonds have an identifier called a CUSIP. You can go to emma.msrb.org and enter the CUSIP to see all trades on the bond. Recent trades marked "Customer Sold" will give you an idea of what to expect if you were to solicit a bid.
Thanks, Longdog.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
bberris
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Re: Selling municipal bonds before maturity

Post by bberris »

patrick013 wrote:It's a good time to sell bonds. Many muni's are selling at sizable
premiums. Perhaps sell a few and invest the cash into something
with a higher tax adjusted YTM with the captured principal.
I don't see how this could be true or possible (getting a higher interest rate). If the bonds are at a decent premium they will probably get called.
Gill
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Re: Selling municipal bonds before maturity

Post by Gill »

I would retain the bonds until maturity which isn't all that far off. You will take a serious haircut in the price if you attempt to sell a small lot before maturity.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
straws46
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Re: Selling municipal bonds before maturity

Post by straws46 »

Bond brokers can charge a commission or a mark, but not both. Commissions have to be disclosed; not so with the mark. That's where EMMA is invaluable to find out what the sale-resale prices are. I would look for a broker who is willing to sell them at a fixed commission per bond and shop around to get the best deal. Although interest on munis is tax free, not so with any gain; so you will need to determine the market value as of date of death. That number will also give you a reasonable expectation as to a fair sale price and if you can't get close, you can always hold.
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patrick013
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Re: Selling municipal bonds before maturity

Post by patrick013 »

bberris wrote:
patrick013 wrote:It's a good time to sell bonds. Many muni's are selling at sizable
premiums. Perhaps sell a few and invest the cash into something
with a higher tax adjusted YTM with the captured principal.
I don't see how this could be true or possible (getting a higher interest rate). If the bonds are at a decent premium they will probably get called.
Well if there's any confusion do a cash return pro-forma if you keep
the bond.

Do a cash return pro-forma if you would sell the bond and reinvest it
into a slightly longer slightly higher YTM bond, all after tax.

Then either keep, or sell and reinvest longer.
age in bonds, buy-and-hold, 10 year business cycle
Topic Author
delamer
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Re: Selling municipal bonds before maturity

Post by delamer »

Once again, thanks for all the information.

As I mentioned earlier, the bonds are part of a portfolio that I inherited. I will need to do estimated tax returns for the next few years to figure out how to minimize taxes since I received a stepped-up basis on some of the assets but not on others. So potential taxes on both bonds and stocks sales will have to be taken into account as I make decisions.

The report I received from the bank who managed the assets shows a current market value for each bond (but not the CUSIP) but I don't have any idea how that value was determined. The current value for each bond is higher than the par value, which is part if the reason that I was confused about why it would be "expensive" to sell them.

Obviously, I will be having a conversation with the bank about how to proceed, but I feel much better informed now.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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patrick013
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Re: Selling municipal bonds before maturity

Post by patrick013 »

I don't think your long term capital gains tax vs. the
premium lost (without tax benefit) if the bonds were
held to maturity would lead you to keep most of the bonds.

Check it out with your favorite tax program.

Tax Estimator - Liberty Tax Service
age in bonds, buy-and-hold, 10 year business cycle
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