Page 1 of 1

High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 11:03 am
by pubman
The bond portion of our taxable joint account has both the High-Yield Tax Exempt and Intermediate-Term Tax Exempt Funds in a ratio of 28% High-Yield and 72% Inter-Term. The present SEC yield is higher for the High-Yield (3.39% vs 2.45%) and long term, the High-Yield has performed better. I realize there is a bit more risk in the High-Yield but I am considering rebalancing the 2 funds so they are about 50/50. The capital gains tax on the sale of the Inter-Term would be minor and we don't expect to draw on either fund for cash anytime in the near future. Any thoughts on moving the Inter-Term holdings into the High-Yield Fund?

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 11:26 am
by unclescrooge
While I have a small sliver of high yield bonds in my portfolio, I would not increase more at this juncture in the cycle.

If anything, I would do the opposite. What you've proposing sounds like performance chasing.

The spread between Muni bonds and junk bonds seems pretty low. As the economy chugs along at full capacity and employment the only way to go is down. As interest rates rise, when we go into recession, a lot of companies that issues these junk bonds will struggle to make payments. The threat of default increases. I don't it's worth it for a minor difference of less than 1% in yield.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 12:13 pm
by dbr
There might be two thoughts.

1. You get to pay your money and take your choice. What that choice is comes down to your own judgement and preference.

2. If you hold a long term investment portfolio of stocks and bonds, then the biggest lever on risk and return is the allocation between stocks and bonds. Calculations can be done, such as in Portfolio Visualizer, to see the expected return and expected volatility of return (aka risk) for different stock/bond ratios and different choices between int. and long munis. I doubt you are dealing with a choice that makes a lot of difference especially while also adjusting the stock/bond lever.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 12:23 pm
by Kenkat
What tax bracket are you in? You need to look at after tax yields to make a fair determination. Ideally, you should hold the high yield bonds in a tax deferred account. As to what the correct ratio should be, that is really a judgement call. Many would say that the reason high yield bonds yield more is because they are riskier. Do you want to take on more risk? Is this the best way to do that? There is no right answer here, at least not without being able to foretell the future.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 12:42 pm
by UpperNwGuy
If you go back and carefully read OP's post, it is about High Yield Tax Exempt, not about High Yield corporate. Some of the responses seem to have missed this fact.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 12:47 pm
by dbr
UpperNwGuy wrote: Sun Jan 20, 2019 12:42 pm If you go back and carefully read OP's post, it is about High Yield Tax Exempt, not about High Yield corporate. Some of the responses seem to have missed this fact.
It could also be a comment that holding any High Yield Tax Exempt takes jusification and the better idea is to just stick to intermediate bonds altogether. If the investor wants to take more risk for more return just allocate a little more to stocks. That is a kind of simple and comfortable way to do this that avoids debating over small points.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 12:56 pm
by KyleAAA
Despite what the name suggests, Vanguard’s high yield muni fund is still an investment grade fund with an average rating of BBB. Granted, the interm term fund has an even higher average credit rating of A, but the high yield fund is by no means a junk bond fund as less than 15% of its assets are below investment grade. Compare that to the high yield corporate fund where less than 10% of its holdings are investment grade. I think the high yield muni fund is probably fine for a core holding, albeit a slightly more aggressive choice.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Sun Jan 20, 2019 12:57 pm
by Kenkat
UpperNwGuy wrote: Sun Jan 20, 2019 12:42 pm If you go back and carefully read OP's post, it is about High Yield Tax Exempt, not about High Yield corporate. Some of the responses seem to have missed this fact.
Ah, yes, you are correct. My mistake, I think I read the title and missed that detail in the post.We sometimes see what we are familiar with as I hold High Yield Corporate and read “High Yield” as that instead.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Mon Jan 21, 2019 4:07 pm
by pubman
KyleAAA wrote: Sun Jan 20, 2019 12:56 pm Despite what the name suggests, Vanguard’s high yield muni fund is still an investment grade fund with an average rating of BBB. Granted, the interm term fund has an even higher average credit rating of A, but the high yield fund is by no means a junk bond fund as less than 15% of its assets are below investment grade. Compare that to the high yield corporate fund where less than 10% of its holdings are investment grade. I think the high yield muni fund is probably fine for a core holding, albeit a slightly more aggressive choice.
Exactly my thoughts. Vanguard's High-Yield funds are anything but junk. Thanks for all the other comments. BTW, I am already heavier than I want to be in stocks, so the increased risk-taking I am seeking must be within my bond funds. Extraordinarily high capital gains are what is preventing me from rebalancing by selling stocks, but I direct the dividends and capital gains thrown off by the stock funds to be reinvested into bond funds.

Re: High Yield vs Inter-Term Tax Exempt - Considering Rebalancing

Posted: Mon Jan 21, 2019 6:31 pm
by dratkinson
The high-yield muni fund includes an allocation to AMT (alternative minimum tax) issues, which will reduce your after-tax income if you are subject to AMT; so the SEC yield is misleading.

Recall Vanguard's HY muni had a 20% AMT exposure (haven't looked lately). Don't know the math to compute your reduced yield if subject to AMT.

Bottom line. Might want to research if/how AMT affects you before exposing yourself to more of it.



If trying to boost yield while avoiding AMT, can look at a long-term national muni fund---more interest rate risk, so not typically recommended. Or research single-state muni funds---more (due diligence required) iffy if not suppled by Vanguard.



Disclosure. My research suggests I became subject to AMT after taking SS in 2018.

My bonds in taxable are: IT national muni, LT national muni, and an IT single-state muni.
--None owned AMT issues when I bought.
--I have enough in IT national muni that I never expect to be forced to sell LT national during a financial emergency, so not too worried about its increased interest rate risk. (But I did recently TLH it.)


My small (single-state muni) fund provider merged with another small fund provider last year. This year I learned that my 1099DIV will include a small (<5%) AMT exposure. Was not what I'd planned when I researched/bought it. So will get to see how this affects my taxes. Yea. :annoyed


I used this reference when researching my AMT exposure:
"Best tools to understand the AMT?": viewtopic.php?f=2&t=161847

The two charts at the linked Kitces reference were most helpful.