High Yield Municipal Bonds: Short or intermediate/long term, which to choose from?

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High Yield Municipal Bonds: Short or intermediate/long term, which to choose from?

Post by alaskagrl1 » Tue Jun 12, 2018 3:52 am

High Yield Municipal Bonds: Short or intermediate/long term, which to choose from?

Hi people,

I’ve been thinking about putting some money into high yield bonds, knowing that they are closer to equities in terms of risk (but not quite as risky) and oftentimes around as high yielding as equities.

The thing is, I’ve heard so many people say that for *regular* municipal bonds, to invest in short term (<5 years) given the interest rate increase risk form the feds that highly probable, about to happen. Of course with shorter term bonds more bonds will come up for maturity and the bond fund management can quickly get another new bond instead of being locked in for 10-20+ years as with long term muni bond funds.
However, for *non regular* AKA high yielding muni bonds, how much does the term matter?
The thing is, if for these high yielding muni bonds if it’s super important to have a short (5 years ish) bond fund instead of a long term fund, then is it worth sacrificing the the yield? Since the longer term the bond then the higher the yield but there will be interest rate risk.

For a 600K portfolio I was initially thinking about doing 100K into NVHIX (Nuveen short term high yield muni bond, lots of articles recommending it but no rated on Morningstar or zack’s) and then 100K divided between BATEX (https://www.zacks.com/funds/mutual-fund/quote/BATEX) aka (http://www.morningstar.com/funds/xnas/batex/quote.html) and DHMBX (https://www.zacks.com/funds/mutual-fund/quote/DHMBX) or maybe NCHRX with rest in regular bonds and in equities and come the impending? Recession of 2019-2021, sell all my shares in all three high yielding bond funds. But, given that the high yield muni market is small and it is hard to buy and sell, does that mean that I wont even be able to sell these HY Muni funds then or would it be for a lower cost? :confused :P :P
https://www.investors.com/etfs-and-fund ... ipal-bond/
And does anybody know anything about Nuveen funds? They tend to have a 100K min, unless you already have 100K in another Nuveen fund then the second or third one you can invest less.

Also, has anybody heard of Closed end funds like tCEV (California muni currently trading at 16 percent discount with 5% yield) or MTT ( target date of 2021 so less interst rate risk?)

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Re: High Yield Municipal Bonds: Short or intermediate/long term, which to choose from?

Post by grabiner » Tue Jun 12, 2018 7:10 pm

There is no free lunch in investing. The longer the duration of your bonds, the more interest-rate risk you take. But other bond investors know the same thing, and will demand higher yields for the longer duration. And you can't avoid the risk of high-yield bonds by selling when a recession hits; everyone else knows about the recession as well, and the price will have adjusted.

Mutual funds trade at net asset value, which makes liquidity less of an issue. Funds usually hold some cash to meet redemption expenses, so that they do not need to sell illiquid bonds.

The one guarantee is that you will pay the expenses. If you buy a fund which holds bonds yielding 5%, but with 1% expenses, you will earn only 4% if the bonds don't default, and you will lose 1% if defaults and downgrades cost an additional 5%. This is the problem with the funds you recommended.

Closed-end funds trading at a discount can theoretically reduce the cost effect. If a fund has a net asset value of $100 per share but is trading at $80, and its bonds yield 5% with 1% expenses, you get the 5% yield as a $4 dividend on the $80 you pay. As long as the discount remains the same, you get the benefit. However, you take other risks; since the fund is traded on the market, it may lose more when the market declines.
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Re: High Yield Municipal Bonds: Short or intermediate/long term, which to choose from?

Post by not4me » Wed Jun 13, 2018 8:47 am

I'm not clear on what your objective is. I'll throw out a few things for you to consider & see if that will help clarify. Start with 'why' you are thinking about high yield bonds. I take from what you've said you are trying to get some added yield & understand you'd be taking on more risk. I know others would have some statistics about high yield which I don't have, but you need to compare them against alternatives & see if you are being adequately compensated for the added risk. You mentioned interest rate risk, but I didn't see anything on credit risk. To me that is a bigger issue with high yield.

I'm not sure where you are getting the advice to have a shorter duration, but that would usually limit the exposure to default. I'm not familiar with the funds you mentioned, but called up some info. The 1st was NVHIX; I understood your message to say it didn't have a Morningstar rating. What I looked at showed 3 stars. it also clearly mentioned it "may opportunistically employ leverage through the use of inverse floating rate securities". That means they are using derivatives to have an "effective" duration. These work until they don't. When things go wrong, the effect will be exaggerated.

You rightly asked about exit strategy. You can likely get out, but the price at which you get out may be much lower than you expect if you sell during a spike down. Your personal tax situation will determine the equivalent yield to use to compare to other investments, but notice that this (& likely other) funds will have some distributions subject to AMT. The expense ratio will be high compared to most bond funds; remember the star ratings are within a category & not between categories. You might want to compare these funds against both regular bond funds & also "regular" municipal bond funds, using your tax situation, & see how much the after tax/expense return difference is.

Did I understand that you are thinking of putting a third of your portfolio in these? That to me is really high risk & I don't see that you are being compensated for that overall risk. Please clarify if I've misread your plan

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Re: High Yield Municipal Bonds: Short or intermediate/long term, which to choose from?

Post by GibsonL6s » Wed Jun 13, 2018 10:20 am

I have the Nuveen fund NVHAX which is ST HY muni, I have been very happy with it. No load at Schwab. It has a higher return than MUB the index fund of munis with a lower standard deviation. It distributes 1.4% more than MUB, but obviously you trade duration risk for credit quality. No free lunch, but I like the fund. Good luck.

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