Opinions on taxable municipal bonds?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Opinions on taxable municipal bonds?

Post by danielc » Sun Jun 17, 2018 1:02 pm

Hello,

Right now I can go to Fidelity and get a taxable municipal bond at a higher after-tax yield than either Treasuries or CDs with the same maturity:

https://fixedincome.fidelity.com/ftgw/f ... hest-yield

If I understand correctly, although municipals are not backed by the federal gov't, they are still very safe and it's entirely reasonable to hold them directly. Am I right?

Thanks for the help.

Cheers,
Daniel.

User avatar
Cyclesafe
Posts: 658
Joined: Wed Dec 31, 2014 1:03 pm

Re: Opinions on taxable municipal bonds?

Post by Cyclesafe » Sun Jun 17, 2018 5:25 pm

Not sure what you mean by taxable municipal bond. In general, muni's are relatively safe, but not as safe as the federal government who can not only tax, but also print. Specifically, however, all muni's are not necessarily safe. That's why they are variously credit rated. Most Boggleheads will hold muni's in a fund rather than individual muni bonds in a ladder due to this specific risk, sometimes poor liquidity, and nearly always highish commissions. Treasury and CD ladders are common, of course.

User avatar
whodidntante
Posts: 4145
Joined: Thu Jan 21, 2016 11:11 pm

Re: Opinions on taxable municipal bonds?

Post by whodidntante » Sun Jun 17, 2018 5:28 pm

Cyclesafe wrote:
Sun Jun 17, 2018 5:25 pm
Not sure what you mean by taxable municipal bond. In general, muni's are relatively safe, but not as safe as the federal government who can not only tax, but also print. Specifically, however, all muni's are not necessarily safe. That's why they are variously credit rated. Most Boggleheads will hold muni's in a fund rather than individual muni bonds in a ladder due to this specific risk, sometimes poor liquidity, and nearly always highish commissions. Treasury and CD ladders are common, of course.
There is a limit to how much of a discount is allowed for a muni bond, while still retaining tax exempt status for the investor. I think most muni funds favor bonds that sell at a premium, because the high coupon effectively shortens duration.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

Re: Opinions on taxable municipal bonds?

Post by gmaynardkrebs » Sun Jun 17, 2018 5:59 pm

danielc wrote:
Sun Jun 17, 2018 1:02 pm
Hello,

Right now I can go to Fidelity and get a taxable municipal bond at a higher after-tax yield than either Treasuries or CDs with the same maturity:

https://fixedincome.fidelity.com/ftgw/f ... hest-yield

If I understand correctly, although municipals are not backed by the federal gov't, they are still very safe and it's entirely reasonable to hold them directly. Am I right?

Thanks for the help.

Cheers,
Daniel.
There's a significant risk gap between Treasuries and munis, particularly at longer duration. Not clear to me if you'd be paid for that risk.

User avatar
Artsdoctor
Posts: 3546
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Opinions on taxable municipal bonds?

Post by Artsdoctor » Sun Jun 17, 2018 6:04 pm

danielc wrote:
Sun Jun 17, 2018 1:02 pm
Hello,

Right now I can go to Fidelity and get a taxable municipal bond at a higher after-tax yield than either Treasuries or CDs with the same maturity:

https://fixedincome.fidelity.com/ftgw/f ... hest-yield

If I understand correctly, although municipals are not backed by the federal gov't, they are still very safe and it's entirely reasonable to hold them directly. Am I right?

Thanks for the help.

Cheers,
Daniel.
Sure. I have a couple of taxable municipal bonds in my IRA. I purchased them at auction, and they're very high quality (Oregon state general obligation bonds). Most people think of munis as being tax-exempt but there are those bonds that are fully taxable. At this time, there is nothing more secure than federal debt but I would be hard-pressed to imagine a state like Oregon defaulting on its general obligation debt.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Opinions on taxable municipal bonds?

Post by danielc » Sun Jun 17, 2018 7:23 pm

Cyclesafe wrote:
Sun Jun 17, 2018 5:25 pm
Not sure what you mean by taxable municipal bond.
I used to think that all municipal bonds are exempt from federal tax, but if you go to Fidelity's list of bonds and CDs there is a line at the bottom that says "Taxable Municipal" and the bonds in that list have the yields that you'd imagine for a taxable instrument like a CD or a corporate bond. In fact, the yields seem to be comparable tp AA corporate bonds.

User avatar
danielc
Posts: 377
Joined: Sun Dec 10, 2017 4:48 am

Re: Opinions on taxable municipal bonds?

Post by danielc » Sun Jun 17, 2018 7:24 pm

Artsdoctor wrote:
Sun Jun 17, 2018 6:04 pm
Sure. I have a couple of taxable municipal bonds in my IRA. I purchased them at auction, and they're very high quality (Oregon state general obligation bonds). Most people think of munis as being tax-exempt but there are those bonds that are fully taxable. At this time, there is nothing more secure than federal debt but I would be hard-pressed to imagine a state like Oregon defaulting on its general obligation debt.
Thanks! Can you help me understand why some munis are taxable? I used to think that all municipal bonds were exempt from federal tax until I saw the list on the Fidelity website.

gmaynardkrebs
Posts: 921
Joined: Sun Feb 10, 2008 11:48 am

Re: Opinions on taxable municipal bonds?

Post by gmaynardkrebs » Sun Jun 17, 2018 7:38 pm

danielc wrote:
Sun Jun 17, 2018 7:24 pm
Artsdoctor wrote:
Sun Jun 17, 2018 6:04 pm
Sure. I have a couple of taxable municipal bonds in my IRA. I purchased them at auction, and they're very high quality (Oregon state general obligation bonds). Most people think of munis as being tax-exempt but there are those bonds that are fully taxable. At this time, there is nothing more secure than federal debt but I would be hard-pressed to imagine a state like Oregon defaulting on its general obligation debt.
Thanks! Can you help me understand why some munis are taxable? I used to think that all municipal bonds were exempt from federal tax until I saw the list on the Fidelity website.
I also wonder if the taxables are GO or revenue.

straws46
Posts: 150
Joined: Fri Jul 03, 2015 11:12 am

Re: Opinions on taxable municipal bonds?

Post by straws46 » Sun Jun 17, 2018 7:38 pm

I may be wrong, but i did not think taxable municipal bonds were general obligations of the issuer. If the bond is a general obligation of the issuing municipality it is exempt from federal income taxes and subject to the taxing authority of the issuer. Taxable bonds are generally issued to support projects that do not sufficiently benefit the general public to qualify for federal income tax exemption, and are supported by a pledge of revenues from the particular project but are not subject to the general taxing power of the issuer. I would be reluctant to buy a taxable muni unless it was insured or backed by a standby letter of credit or standby bond purchase agreement from a creditworthy financial institution.

Please correct me if I am mistaken.

User avatar
Artsdoctor
Posts: 3546
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Opinions on taxable municipal bonds?

Post by Artsdoctor » Sun Jun 17, 2018 7:41 pm


jbranx
Posts: 264
Joined: Thu Feb 09, 2017 6:57 pm

Re: Opinions on taxable municipal bonds?

Post by jbranx » Sun Jun 17, 2018 8:18 pm

There were a lot of taxable munis issued during the financial crisis as a result of the federal support at a fairly high percentage as I recall. If you want to take a flyer on a closed-end taxable municipal fund, take a look at Blackrock's BBN ticker. Discount is about six percent and the yield is 7.30%. The leverage is 36% for a $2 billion dollar fund. Nuveen also has one. Risky as the discount can widen and the cost of leverage can rise, but i'd much rather take risk like this than risk on a secondary issue. The expense ratio, including the cost of leverage, is high at 1.51%, fairly common for closed end leveraged funds.

The spreads can be high on buy/sells of individual issues, plus many of them, like the Univ. of VA one in the Fidelity link the OP provided, is callable at any time, though it does have some incredible maturity into the next century if I understood the data right.

User avatar
Artsdoctor
Posts: 3546
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Opinions on taxable municipal bonds?

Post by Artsdoctor » Mon Jun 18, 2018 8:38 am

straws46 wrote:
Sun Jun 17, 2018 7:38 pm
I may be wrong, but i did not think taxable municipal bonds were general obligations of the issuer. If the bond is a general obligation of the issuing municipality it is exempt from federal income taxes and subject to the taxing authority of the issuer. Taxable bonds are generally issued to support projects that do not sufficiently benefit the general public to qualify for federal income tax exemption, and are supported by a pledge of revenues from the particular project but are not subject to the general taxing power of the issuer. I would be reluctant to buy a taxable muni unless it was insured or backed by a standby letter of credit or standby bond purchase agreement from a creditworthy financial institution.

Please correct me if I am mistaken.
I'm actually not sure what goes into the decision on making a GO tax-exempt versus taxable. The bonds I have were issued in conjunction with tax-exempt bonds simultaneously, but I can't speak to how often this occurs. The EMMA statement is here, if you're interested:

https://emma.msrb.org/EP806799-EP624892-EP1026651.pdf

not4me
Posts: 427
Joined: Thu May 25, 2017 3:08 pm

Re: Opinions on taxable municipal bonds?

Post by not4me » Mon Jun 18, 2018 11:23 am

I don't think you'll get a single answer that applies to all the taxable munis. I believe there is a fine line somewhere between a 'private activity' bond & a taxable. The private activity bonds are usually referred to as tax-exempt, but they may trigger the AMT (which may be less an issue starting with this tax year?). I think it was about 8 or 9 years back there was a federal program to encourage some types of activity & they issued "Build America" bonds (I think that was their name). In some of those cases, the feds were subsidizing in different ways, but they were taxable. That program ended, but bonds still out there.

Basically though, yield will reflect supply & demand. 2 bonds with the same risk, duration, etc may have different yields because one issuer is better known, in greater demand, etc. Some munis are very obscure & so thinly traded that the demand suffers & the yield must go up to entice more demand.

Buying an individual bond means digging into details of the issuance. I wouldn't do it, although that might mean I'd pass up a slight bit of $

Post Reply