Why did Muni funds crash today?

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gst
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Why did Muni funds crash today?

Post by gst » Thu Mar 12, 2020 1:07 pm

The Vanguard Tax-Exempt Bond ETF crashed today by 6%. What's the reason behind this? Are investors concerned that municipalities might go bankrupt because of the virus?

I'm usually a fan of "stay the course" and just rebalanced some of my bonds back into stocks to stay at my target allocation. But given that 100% of my bonds are munis this crash just invalidated my assumption that muni bonds should be relatively safe in a stock market crash. I'm currently trying to figure out if it makes sense to sell my remaining muni bonds and trade them for another bond fund (not because they crashed, but because my risk assumption about them was obviously wrong).

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watchnerd
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Re: Why did Muni funds crash today?

Post by watchnerd » Thu Mar 12, 2020 1:13 pm

gst wrote:
Thu Mar 12, 2020 1:07 pm
The Vanguard Tax-Exempt Bond ETF crashed today by 6%. What's the reason behind this? Are investors concerned that municipalities might go bankrupt because of the virus?

I'm usually a fan of "stay the course" and just rebalanced some of my bonds back into stocks to stay at my target allocation. But given that 100% of my bonds are munis this crash just invalidated my assumption that muni bonds should be relatively safe in a stock market crash. I'm currently trying to figure out if it makes sense to sell my remaining muni bonds and trade them for another bond fund (not because they crashed, but because my risk assumption about them was obviously wrong).
Why wouldn't they be down?

Munis have credit risk vs Treasuries.

2008-2009 showed a similar pattern.

Those tax-exempt returns are not a free lunch.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

staustin
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Re: Why did Muni funds crash today?

Post by staustin » Thu Mar 12, 2020 1:15 pm

guessing: if etf can be a rush to the exits by hedge funds who are selling bonds to buy equities. if a fund, yields rising?

edit: from bloomberg, "yields on 10-year benchmark state and local government debt jumped 22 basis points to 1.15% as of 1:00 p.m. Wednesday, heading for the biggest one-day leap since Bloomberg’s records began in 2011. Yields on long-dated bonds rose 24 basis points."

xraygoggles
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Re: Why did Muni funds crash today?

Post by xraygoggles » Thu Mar 12, 2020 1:21 pm

watchnerd wrote:
Thu Mar 12, 2020 1:13 pm
gst wrote:
Thu Mar 12, 2020 1:07 pm
The Vanguard Tax-Exempt Bond ETF crashed today by 6%. What's the reason behind this? Are investors concerned that municipalities might go bankrupt because of the virus?

I'm usually a fan of "stay the course" and just rebalanced some of my bonds back into stocks to stay at my target allocation. But given that 100% of my bonds are munis this crash just invalidated my assumption that muni bonds should be relatively safe in a stock market crash. I'm currently trying to figure out if it makes sense to sell my remaining muni bonds and trade them for another bond fund (not because they crashed, but because my risk assumption about them was obviously wrong).
Why wouldn't they be down?

Munis have credit risk vs Treasuries.

2008-2009 showed a similar pattern.

Those tax-exempt returns are not a free lunch.
I was also wondering the same thing, but that makes sense.

Question: is it more risky to have single state munis vs national? I have CA, which I figured would be very stable since it's a huge economy.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

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watchnerd
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Re: Why did Muni funds crash today?

Post by watchnerd » Thu Mar 12, 2020 1:25 pm

xraygoggles wrote:
Thu Mar 12, 2020 1:21 pm


Question: is it more risky to have single state munis vs national? I have CA, which I figured would be very stable since it's a huge economy.
You should only hold a single-state muni fund if you're a resident of that state and can reap the extra tax savings in return for your concentrated risk.

I wouldn't hold CA, NY, etc, unless I were a resident of those states.

CA is a big state, with a big economy, but it's not as big as all the states combined in a national muni fund.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

rocketsrule
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Re: Why did Muni funds crash today?

Post by rocketsrule » Thu Mar 12, 2020 1:27 pm

Jeez, I have $40k in VTEB and just saw it crashed a bit.

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watchnerd
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Re: Why did Muni funds crash today?

Post by watchnerd » Thu Mar 12, 2020 1:34 pm

rocketsrule wrote:
Thu Mar 12, 2020 1:27 pm
Jeez, I have $40k in VTEB and just saw it crashed a bit.
I would not be surprised to see further erosion in the muni bond fund NAV prices as the virus spreads.


(Full disclosure: I sold all my munis in 2019 and moved to Treasuries once the spreads go too narrow for my liking)
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

xraygoggles
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Re: Why did Muni funds crash today?

Post by xraygoggles » Thu Mar 12, 2020 1:49 pm

watchnerd wrote:
Thu Mar 12, 2020 1:25 pm
xraygoggles wrote:
Thu Mar 12, 2020 1:21 pm


Question: is it more risky to have single state munis vs national? I have CA, which I figured would be very stable since it's a huge economy.
You should only hold a single-state muni fund if you're a resident of that state and can reap the extra tax savings in return for your concentrated risk.

I wouldn't hold CA, NY, etc, unless I were a resident of those states.

CA is a big state, with a big economy, but it's not as big as all the states combined in a national muni fund.
Yes I'm in the highest tax bracket in CA.

Another question if you don't mind: I get there's credit risk, but isn't it backed by the state govt?
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

Irisheyes
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Re: Why did Muni funds crash today?

Post by Irisheyes » Thu Mar 12, 2020 1:50 pm

watchnerd wrote:
Thu Mar 12, 2020 1:34 pm
rocketsrule wrote:
Thu Mar 12, 2020 1:27 pm
Jeez, I have $40k in VTEB and just saw it crashed a bit.
I would not be surprised to see further erosion in the muni bond fund NAV prices as the virus spreads.


(Full disclosure: I sold all my munis in 2019 and moved to Treasuries once the spreads go too narrow for my liking)
Aach. Well played. I thought about it, thought about it and then didnt. :(

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watchnerd
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Re: Why did Muni funds crash today?

Post by watchnerd » Thu Mar 12, 2020 2:26 pm

xraygoggles wrote:
Thu Mar 12, 2020 1:49 pm

Another question if you don't mind: I get there's credit risk, but isn't it backed by the state govt?
Not all muni bonds are state-level general obligation bonds.

If you check the portfolio holdings of most muni funds, you'll find a mixture of state-level bonds, local city bonds, infrastructure, education, etc.

Also, some will have insurance, some won't.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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watchnerd
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Re: Why did Muni funds crash today?

Post by watchnerd » Thu Mar 12, 2020 2:31 pm

The classic example in CA was the city of Stockton.

Stockton declared municipal bankruptcy in 2012, massive restructuring of all its debt.
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fyre4ce
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Re: Why did Muni funds crash today?

Post by fyre4ce » Thu Mar 12, 2020 7:00 pm

Could it be paying out a dividend or something like that?

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watchnerd
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Re: Why did Muni funds crash today?

Post by watchnerd » Thu Mar 12, 2020 7:04 pm

fyre4ce wrote:
Thu Mar 12, 2020 7:00 pm
Could it be paying out a dividend or something like that?
-5.85% is not a dividend payout
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indexlover
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Re: Why did Muni funds crash today?

Post by indexlover » Thu Mar 12, 2020 9:17 pm

I looked at VWIUX ( Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares ) and it is down 2.40% today. Can that be characterized as a crash ?
Given that VBTLX ( Vanguard Total Bond Market Index Fund Admiral Shares) is down 0.96% and is much less risky . This is not too bad. right ?

Update: Added Baird's BMBIX which is one the safest intermediate Muni fund for comparison. It was down 23 cents or 1.94%.
Last edited by indexlover on Thu Mar 12, 2020 9:25 pm, edited 1 time in total.
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JD13
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Re: Why did Muni funds crash today?

Post by JD13 » Thu Mar 12, 2020 9:22 pm

That's the problem with ETFs. The ETF has crashed 6% whereas the fund has fallen only by 1.29%

gpburdell
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Re: Why did Muni funds crash today?

Post by gpburdell » Fri Mar 13, 2020 2:14 am

VTEB is currently trading at a $2 (4%) discount to the NAV. Many bond fund etfs are trading at big discounts. Talk about being surprised when I saw that FLOT dropped almost 7% today which I have 1/3 of emergency fund in. This is an ultra short bond but it is trading at a 8% discount.

I assume/hope these funds will correct back to the NAV once things settle down.

annu
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Re: Why did Muni funds crash today?

Post by annu » Fri Mar 13, 2020 2:38 am

What about high dividend stocks like https://investor.vanguard.com/etf/profile/VYM

It's almost fire sale right now....

hudson
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VWIUX Vanguard Intermediate Muni

Post by hudson » Fri Mar 13, 2020 6:59 am

Here's some VWIUX history 2008, 2009, 2020...just data...in another discussion:

viewtopic.php?p=5090039#p5090039

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