Muni Bonds/Funds

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exoilman
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Muni Bonds/Funds

Post by exoilman »

I am thinking of muni bonds or muni fund(s) to add to our portfolio. We are high income tax and high state tax (NJ) retired folks. If so, would out of state be included? If individual I would be ok with 3 years out. Any muni fund recommendations would be considered also. The reason I ask is we have CD’s coming due this year.

Thanks
Sam
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David Jay
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Re: Muni Bonds/Funds

Post by David Jay »

What is your marginal tax rate? If you are in the 22% tax bracket (~$195,000 after standard deduction) then Muni’s likely don’t make sense.

If you are in the 32% or 35% bracket then Munis may well make sense.
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Re: Muni Bonds/Funds

Post by grabiner »

If you are in a high tax bracket, and in a small state like NJ, you probably don't want all your bonds in that state. My usual recommendation is 50% Vanguard NJ Long-Term Tax-Exempt, and 50% Vanguard Limited-Term Tax-Exempt; this gives you an overall intermediate-term duration, with only half your bonds in NJ, and more than half your bond income exempt from NJ tax.

In the 24% bracket, you might use half Vanguard NJ Long-Term Tax-Exempt, and half in a Treasury fund which is also tax-exempt in NJ, say Vanguard Inflation-Protected Securities. A national muni fund isn't that attractive in the 24% bracket.
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Re: Muni Bonds/Funds

Post by MikeG62 »

exoilman wrote: Tue Oct 06, 2020 1:47 pm I am thinking of muni bonds or muni fund(s) to add to our portfolio. We are high income tax and high state tax (NJ) retired folks. If so, would out of state be included? If individual I would be ok with 3 years out. Any muni fund recommendations would be considered also. The reason I ask is we have CD’s coming due this year.

Thanks
Sam
Hi Sam,

Just to set your expectations, muni yields have slipped considerably over the last 12-months. So yields will be pretty low and remember you are taking risk (arguably more risk than previously given state finances and the impact of the pandemic).

Having said that, the investment options for nationally diversified muni bond funds/ETF's typically mentioned on these forums include:

1. BMBIX (note 30-day SEC yield of only 0.73% as of 8/31 - pay little to no attention to distribution yields as those include a return of principal - with 69% AAA and 30% AA)

2. MUB (30-day SEC yield of 1.10% with 23% AAA and 55% AA)

3. SHM (30-day SEC Yield of 0.09% with 31% AAA and 68% AA)

4. SUB (30-day SEC Yield of 0.32% with 37% AAA and 49% AA)

I have not bought a muni bond in over 24 months. So what I am doing instead? CD's.

If you were once in the armed forces (honorable discharge) or an immediate family member was in the armed forces, you are eligible to join Barksdale Federal CU. CD rates at Barksdale are industry leading (5-year CD ladder currently at 1.30%, 1.50%, 1.60%, 1.70% and 1.80% for the 12, 24, 36, 48 and 60 month rungs of the ladder). And zero risk if you say within the NCUA insurance limits.
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hudson
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Re: Muni Bonds/Funds

Post by hudson »

exoilman wrote: Tue Oct 06, 2020 1:47 pm I am thinking of muni bonds or muni fund(s) to add to our portfolio. We are high income tax and high state tax (NJ) retired folks. If so, would out of state be included? If individual I would be ok with 3 years out. Any muni fund recommendations would be considered also. The reason I ask is we have CD’s coming due this year.

Thanks
Sam
exoilman,

There's lots of good advice above.
I like VWIUX and BMBIX...both intermediate muni funds...BMBIX is very safe...VWIUX pays out more and has a leg up on many other funds in case you ever want to tax loss harvest....because of its daily accrual method.
It also depends on your tax bracket. If you are in a borderline tax bracket, consider doing the math as compared to other investments. I always compare to CDs...because that's my other choice. My choices are high quality muni funds or CDs.

I like to use the distribution yield when figuring, because, that's actually what you are paid...and that's what you pay state taxes on...if appropriate. There are several Boglehead discussions on distribution yield vs SEC yield. One probably should research this issue before using either.
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Re: Muni Bonds/Funds

Post by ivgrivchuck »

exoilman wrote: Tue Oct 06, 2020 1:47 pm I am thinking of muni bonds or muni fund(s) to add to our portfolio. We are high income tax and high state tax (NJ) retired folks. If so, would out of state be included? If individual I would be ok with 3 years out. Any muni fund recommendations would be considered also. The reason I ask is we have CD’s coming due this year.

Thanks
Sam
I'd recommend sticking with CDs. Muni bonds pay a little extra, but you take some credit risk and one-sided duration risk. In my opinion you are not sufficiently compensated for the risk.
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Re: Muni Bonds/Funds

Post by jrbdmb »

According to S&P, New Jersey's credit rating is currently A- with a negative outlook. The only state worse off is Illinois with a BBB- rating. Note that A- is four steps above junk status, while BBB- is the lowest grade not considered junk. 45 of the 50 U.S. states are rated AA- and above.

Be very cautious overloading on state debt from places with marginal credit quality.

https://www.spglobal.com/ratings/en/res ... st-1738758
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grabiner
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Re: Muni Bonds/Funds

Post by grabiner »

jrbdmb wrote: Thu Oct 08, 2020 12:03 pm According to S&P, New Jersey's credit rating is currently A- with a negative outlook. The only state worse off is Illinois with a BBB- rating. Note that A- is four steps above junk status, while BBB- is the lowest grade not considered junk. 45 of the 50 U.S. states are rated AA- and above.

Be very cautious overloading on state debt from places with marginal credit quality.

https://www.spglobal.com/ratings/en/res ... st-1738758
Despite that credit rating, 37% of the bonds in the NJ muni fund are rated AA or better. Some of these bonds may have a dedicated revenue source which is stronger than the state (turnpike bonds, for example), while others may be insured.

Still, the fund has a lower credit quality than Vanguard's other single-state funds, and while there is a higher yield as compensation, the higher yield does not compensate fully for the lack of diversification among risky bonds. This is why I prefer 50% NJ and 50% national munis (or Treasuries in a lower federal bracket) rather than all NJ munis.
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Re: Muni Bonds/Funds

Post by hudson »

grabiner wrote: Thu Oct 08, 2020 10:20 pm Despite that credit rating, 37% of the bonds in the NJ muni fund are rated AA or better. Some of these bonds may have a dedicated revenue source which is stronger than the state (turnpike bonds, for example), while others may be insured.

Still, the fund has a lower credit quality than Vanguard's other single-state funds, and while there is a higher yield as compensation, the higher yield does not compensate fully for the lack of diversification among risky bonds. This is why I prefer 50% NJ and 50% national munis (or Treasuries in a lower federal bracket) rather than all NJ munis.
Vanguard New Jersey Long-Term Tax-Exempt Fund Investor Shares (VNJTX)...
This Vanguard state specific muni fund is tempting because of the attractive payouts...almost 3% along with no state or federal taxes. Larry Swedroe in his book recommends intermediate and AAA/AA munis. This long muni fund has about 36% BBB munis...ouch.
If I lived in NJ, I would probably own some; I wouldn't make it a major holding.

I like Vanguard's intermediate muni VWIUX which doesn't quite meet Larry Swedroe's AAA/AA recommendation. Baird's intermediate muni BMBIX does meet Larry's recommendation.

Bill Bernstein's short advice on munis is here: viewtopic.php?p=5160087#p5160087
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exoilman
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Re: Muni Bonds/Funds

Post by exoilman »

Thanks everyone for your input. At 76 and DW 70 we don’t need to grow our investments any longer. We are 35% federal and 6.37% state. So if additional ideas come to mind we will appreciate.

Sam
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grabiner
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Re: Muni Bonds/Funds

Post by grabiner »

hudson wrote: Fri Oct 09, 2020 5:11 am
grabiner wrote: Thu Oct 08, 2020 10:20 pm Despite that credit rating, 37% of the bonds in the NJ muni fund are rated AA or better. Some of these bonds may have a dedicated revenue source which is stronger than the state (turnpike bonds, for example), while others may be insured.

Still, the fund has a lower credit quality than Vanguard's other single-state funds, and while there is a higher yield as compensation, the higher yield does not compensate fully for the lack of diversification among risky bonds. This is why I prefer 50% NJ and 50% national munis (or Treasuries in a lower federal bracket) rather than all NJ munis.
Vanguard New Jersey Long-Term Tax-Exempt Fund Investor Shares (VNJTX)...
This Vanguard state specific muni fund is tempting because of the attractive payouts...almost 3% along with no state or federal taxes. Larry Swedroe in his book recommends intermediate and AAA/AA munis. This long muni fund has about 36% BBB munis...ouch.
If I lived in NJ, I would probably own some; I wouldn't make it a major holding.
And as with many bond funds, the payout is not the expected return. Even if none of the bonds in the fund default, they will decline in value as they approach maturity, because bond prices rose as rates fell. (Whether the fund declines in value next year depends on what happens to bond yields, but if yields don't change, the fund will still decline in value.)

(I didn't hold this fund when I lived in NJ, but for reasons unrelated to credit quality; I held all my bonds in my employer plan. I would have used the fund for part of my bond allocation if I had held bonds in my taxable account.)
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Re: Muni Bonds/Funds

Post by hudson »

grabiner wrote: Wed Oct 14, 2020 10:53 pm
hudson wrote: Fri Oct 09, 2020 5:11 am
grabiner wrote: Thu Oct 08, 2020 10:20 pm Despite that credit rating, 37% of the bonds in the NJ muni fund are rated AA or better. Some of these bonds may have a dedicated revenue source which is stronger than the state (turnpike bonds, for example), while others may be insured.

Still, the fund has a lower credit quality than Vanguard's other single-state funds, and while there is a higher yield as compensation, the higher yield does not compensate fully for the lack of diversification among risky bonds. This is why I prefer 50% NJ and 50% national munis (or Treasuries in a lower federal bracket) rather than all NJ munis.
Vanguard New Jersey Long-Term Tax-Exempt Fund Investor Shares (VNJTX)...
This Vanguard state specific muni fund is tempting because of the attractive payouts...almost 3% along with no state or federal taxes. Larry Swedroe in his book recommends intermediate and AAA/AA munis. This long muni fund has about 36% BBB munis...ouch.
If I lived in NJ, I would probably own some; I wouldn't make it a major holding.
And as with many bond funds, the payout is not the expected return. Even if none of the bonds in the fund default, they will decline in value as they approach maturity, because bond prices rose as rates fell. (Whether the fund declines in value next year depends on what happens to bond yields, but if yields don't change, the fund will still decline in value.)

(I didn't hold this fund when I lived in NJ, but for reasons unrelated to credit quality; I held all my bonds in my employer plan. I would have used the fund for part of my bond allocation if I had held bonds in my taxable account.)
I agree with Grabiner on the payouts and the decline in value.
For the Vanguard muni fund that I own, I realize that the long term payout is likely the SEC yield.
Monthly, I watch the payouts or distribution yield and the fund's net asset value (NAV) or price. If the NAV drops below my buying price, I'll tax loss harvest. If the payouts drop, and I can find a better after tax deal, I'll jump ship. I'm a "short term" muni holder who has been holding for a long time...at least 10 years.

When I lived in NJ, I'm not sure bond funds existed....1969. My salary was $99 a month and my car payment was $60.25. Life was good. I always found the midlands of NJ to be a magical place.
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