Unrated municipal bonds

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jbolden1517
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Unrated municipal bonds

Post by jbolden1517 » Sun Aug 20, 2017 6:24 pm

I could use a little help on this one. I was reading that unrated municipal bonds (story bonds) default about 1/19th of the time. The yields seem to easily cover that. Tax free interest and capital gains tax loses sound good.

1) Am I missing a catch somewhere? The tax adjusted yields seem much better than corporates of similar quality.
2) Are these sometimes / always / never AMT free?
3) What's the best source to learn about these?

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grabiner
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Re: Unrated municipal bonds

Post by grabiner » Sun Aug 20, 2017 8:53 pm

You are looking at an average. Unrated municipal bonds have a wide quality range; some have very low default risk (and are likely to have low yields), while others have high risk.

In addition, the higher yields need to compensate for more than the average default risk, because default risk increases when other investments decline as well. If you can buy a bond fund with a 2% yield and no defaults, or with a 6% yield losing 2% per year to defaults, you might still be better off with the lower-yielding fund; the high-yield fund might lose 1% to defaults in most years, but lose 20% to defaults and downgrades in 2008 when your stock holdings crash.

This is even more important if you are buying individual munis, because it is much harder for you to diversify. A high-yield bond fund can buy bonds from 200 issuers, so that it isn't hurt badly if it has 8 defaults rather than the expected 4. As an individual investor, you won't be able to buy that large a portfolio, and you will have large trading costs if you buy small lots of bonds.

Whether a bond is AMT-free depends on its purpose, not on whether it is rated. If you buy bonds through a bond fund, the fund will tell you how much of its holdings are subject to AMT. Vanguard's muni funds have a few unrated bonds, but only High-Yield Tax-Exempt and the money-market funds hold any AMT bonds.
David Grabiner

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Re: Unrated municipal bonds

Post by jbolden1517 » Mon Aug 21, 2017 3:48 am

grabiner wrote:
Sun Aug 20, 2017 8:53 pm
You are looking at an average. Unrated municipal bonds have a wide quality range; some have very low default risk (and are likely to have low yields), while others have high risk.

In addition, the higher yields need to compensate for more than the average default risk, because default risk increases when other investments decline as well. If you can buy a bond fund with a 2% yield and no defaults, or with a 6% yield losing 2% per year to defaults, you might still be better off with the lower-yielding fund; the high-yield fund might lose 1% to defaults in most years, but lose 20% to defaults and downgrades in 2008 when your stock holdings crash.
I get that unrated municipal bonds are not the things to try and sell during market turbulence. I get that market value on these things could be 20% of par in illiquid markets and I might have to wait up to a few months. I'm good with that. I'm a stock investor for many years I've had holding of mine go to 0. Moreover I've been frustrated several times that mutual funds "close to new investors" when they drop 20%+ during times of market turbulence. Heck if the existing shareholders want out for $.60 on the dollar I'm happy to pay the $.60 and let them out. One of the reasons I'm excited about ETF bond funds is that the SEC won't "protect me" hopefully.
grabiner wrote:
Sun Aug 20, 2017 8:53 pm
This is even more important if you are buying individual munis, because it is much harder for you to diversify. A high-yield bond fund can buy bonds from 200 issuers, so that it isn't hurt badly if it has 8 defaults rather than the expected 4. As an individual investor, you won't be able to buy that large a portfolio, and you will have large trading costs if you buy small lots of bonds.
I get it. Do you have any specifics on what the trading costs are likely to be though. This is an area where I'm ignorant. Am I looking at 30 basis points for diversification or 300 or 3000? The problem with funds is the SEC has strict liquidity rules which prohibit funds (and ETFs) from holding a substantial percentage of illiquid bonds. There are some funds like American funds high yield municipal ETFs which seem like they are up to 30% but I'd rather be at 100%. Yep, I get that means I take on some systematic risk. But I'll take on risks as long as being compensated enough for them.
grabiner wrote:
Sun Aug 20, 2017 8:53 pm
Whether a bond is AMT-free depends on its purpose, not on whether it is rated. If you buy bonds through a bond fund, the fund will tell you how much of its holdings are subject to AMT. Vanguard's muni funds have a few unrated bonds, but only High-Yield Tax-Exempt and the money-market funds hold any AMT bonds.
Meaning only the high yield tax exempt hold bonds that aren't AMT free or are AMT free? Sorry problem understanding the lingo.

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in_reality
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Re: Unrated municipal bonds

Post by in_reality » Mon Aug 21, 2017 5:31 am

jbolden1517 wrote:
Mon Aug 21, 2017 3:48 am
Do you have any specifics on what the trading costs are likely to be though.
None. Never traded an individual bond.
jbolden1517 wrote:
Mon Aug 21, 2017 3:48 am
There are some funds like American funds high yield municipal ETFs which seem like they are up to 30% but I'd rather be at 100%. Yep, I get that means I take on some systematic risk. But I'll take on risks as long as being compensated enough for them.
What fund is that??? American High-Income Municipal Bond Fund (AMHIX) is 18.4%

So if unrated municipals are a potential strategy, why wouldn't fund managers target them? I'm not talking mutual fund or ETF managers here, they have fund flows to content with and obviously people might jump ship too much on unrated bonds.

What about CEF managers who don't have to sell unrated bonds even when the CEF sells off? Why wouldn't they target the space?

Screening CEF funds for high yield gives 14 national funds. Didn't look at State specific. 7 of which have over 20%.

OIA 42%
NMZ 27%
NHA 26%
Mua 24%
Mfm 24%
MHI 24%
MAV 23%

(apologies if tickers got garbled by autocorrection. I dropped them in a note application and caught Mfm getting changed to Mom but don't have time to double check them all).

OIA looks like the best bet at 42%. It's also 25% AAA/AA so the share of junk is much less that what's in American Funds.

2013-15 seemed a good time to get in but it's trading at a 4.5% premium. I rebalanced into some CEFs recently and my average premium was around -3% (was a little hesitant as last time was -8%, but that was then). I own 6 of the 7 funds listed above as part of the S-Network Municipal Bond Closed-End Fund Index (CEFMXTR), but all together those 6 funds are only 5.2% and the percent of non-rated munis overall is less than 7. The fund methodology does have it overweighting funds trading at a bigger discount, so it's possible that is having an effect.

I guess OIA might not work for you but just thought I'd throw it out there. I'm sure it has a high ER reflecting leverage costs...

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Re: Unrated municipal bonds

Post by jbolden1517 » Mon Aug 21, 2017 9:30 am

in_reality wrote:
Mon Aug 21, 2017 5:31 am
What fund is that??? American High-Income Municipal Bond Fund (AMHIX) is 18.4%
That's the one I meant. I agree they are lower than 30 now, I was just saying that's the best I can hope for and I wanted to be higher.
in_reality wrote:
Mon Aug 21, 2017 5:31 am
So if unrated municipals are a potential strategy, why wouldn't fund managers target them? I'm not talking mutual fund or ETF managers here, they have fund flows to content with and obviously people might jump ship too much on unrated bonds.

What about CEF managers who don't have to sell unrated bonds even when the CEF sells off? Why wouldn't they target the space?
The SEC is bad about illiquid investments because there is no easily computed NAV. Also the municipal bond market is very small investor oriented. I'm not sure if that's political or cultural though. But this is why I'm asking. I want to try and figure out if I'm missing something or there is just a long term sweet spot I should be allocated to forever.
in_reality wrote:
Mon Aug 21, 2017 5:31 am
I own 6 of the 7 funds listed above as part of the S-Network Municipal Bond Closed-End Fund Index (CEFMXTR), but all together those 6 funds are only 5.2% and the percent of non-rated munis overall is less than 7. The fund methodology does have it overweighting funds trading at a bigger discount, so it's possible that is having an effect.
How do you trade the S-Network. As part of Motif or ...?
in_reality wrote:
Mon Aug 21, 2017 5:31 am
I guess OIA might not work for you but just thought I'd throw it out there. I'm sure it has a high ER reflecting leverage costs...
OIA sounds good. I will keep my eye on it to see what happens when there is a municipal scare. If it drops hard and i even sorta like the portfolio I'm jumping in. Good suggestion!

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in_reality
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Re: Unrated municipal bonds

Post by in_reality » Mon Aug 21, 2017 9:55 am

jbolden1517 wrote:
Mon Aug 21, 2017 9:30 am
How do you trade the S-Network. As part of Motif or ...?
There is an ETF that tracks it - XMPT. https://www.vaneck.com/etf/income/xmpt/overview/

My wife holds cash and I use a leveraged fund to try and target about BND returns overall. Yeah, silly but that's how it is. Barbell approach I guess.

Anyway, VanEck is the manager. I noticed a while back when Puerto Rico was starting to become an issue the Van Eck's high yield fund was lighter than others. They stated they have a fiduciary duty in addition to the responsibility of following the index.

I went to XMPT over high yield because it's higher quality (though does contain some high yield).

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Re: Unrated municipal bonds

Post by jbolden1517 » Mon Aug 21, 2017 10:23 am

in_reality wrote:
Mon Aug 21, 2017 9:55 am
jbolden1517 wrote:
Mon Aug 21, 2017 9:30 am
How do you trade the S-Network. As part of Motif or ...?
There is an ETF that tracks it - XMPT. https://www.vaneck.com/etf/income/xmpt/overview/
That is an excellent suggestion. Not unrated bonds but i just picked some shares of that one up. I'm going to mostly buy in when I see a bigger discount but I love the idea of a fund that is cheap that buys CEFs of municipals at a discount to NAV.

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Re: Unrated municipal bonds

Post by grabiner » Mon Aug 21, 2017 10:35 pm

jbolden1517 wrote:
Mon Aug 21, 2017 3:48 am
Moreover I've been frustrated several times that mutual funds "close to new investors" when they drop 20%+ during times of market turbulence.
I don't remember many examples of mutual funds closing to new investors when they fall; typically, when a fund falls, it has more withdrawals than deposits, so it wants new investors. More often, mutual funds close to new investors because they have problems handling inflows, which occurs when they rise. (This is not likely to happen with index funds, whether mutual funds or ETFs.)
grabiner wrote:
Sun Aug 20, 2017 8:53 pm
Whether a bond is AMT-free depends on its purpose, not on whether it is rated. If you buy bonds through a bond fund, the fund will tell you how much of its holdings are subject to AMT. Vanguard's muni funds have a few unrated bonds, but only High-Yield Tax-Exempt and the money-market funds hold any AMT bonds.
Meaning only the high yield tax exempt hold bonds that aren't AMT free or are AMT free? Sorry problem understanding the lingo.
High-Yield Tax-Exempt holds some bonds which are subject to AMT; the other non-MM funds are AMT-free. You can check the tax information on Vanguard's web site.

It's also worth noting that Vanguard High-Yield Tax-Exempt is not a high-yield fund in the traditional sense; it holds medium-quality bonds, without much in junk.
David Grabiner

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Re: Unrated municipal bonds

Post by jbolden1517 » Tue Aug 22, 2017 1:57 am

grabiner wrote:
Mon Aug 21, 2017 10:35 pm
jbolden1517 wrote:
Mon Aug 21, 2017 3:48 am
Moreover I've been frustrated several times that mutual funds "close to new investors" when they drop 20%+ during times of market turbulence.
I don't remember many examples of mutual funds closing to new investors when they fall; typically, when a fund falls, it has more withdrawals than deposits, so it wants new investors. More often, mutual funds close to new investors because they have problems handling inflows, which occurs when they rise. (This is not likely to happen with index funds, whether mutual funds or ETFs.)
Best example I can think of was the first time it happened to me. Heartland High-Yield Municipal Bond and Heartland Short-Duration Municipal. Funds dropped. There were outflows. Market was illiquid. Heartland had to mark the funds to market which dropped them 70%. I wanted to buy in if investors were panicked. SEC reversed my buy.

I think the fund was yielding over 18% tax free. I was furious with the SEC.

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Re: Unrated municipal bonds

Post by denovo » Tue Aug 22, 2017 2:11 am

jbolden1517 wrote:
Sun Aug 20, 2017 6:24 pm
I could use a little help on this one. I was reading that unrated municipal bonds (story bonds) default about 1/19th of the time. The yields seem to easily cover that. Tax free interest and capital gains tax loses sound good.

1) Am I missing a catch somewhere? The tax adjusted yields seem much better than corporates of similar quality.
2) Are these sometimes / always / never AMT free?
3) What's the best source to learn about these?
"More money has been lost reaching for yield than at the point of a gun."
https://seekingalpha.com/article/373965 ... -point-gun

Assume the markets are approximately rational. Interest rates reflect risk to capital. Go for investment-grade bonds. Take your risk on the equity side.

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Re: Unrated municipal bonds

Post by Sconie » Tue Aug 22, 2017 5:45 am

I've made some good money over the years purchasing small municipal issues. A few thoughts, in no particular order....

-Little communities pay their bills just like large ones do----(sometimes better)-----but frequently their issuances is so small that it doesn't pay for them to get the issue rated or insured.
-Stick to GOs and avoid revenue bonds
-"Know" the communities that you are buying
-Buy them as new issues and be prepared to hold them to maturity. (I generally tried to stay in the 7-12 year maturity bracket.) As these bonds lack a rating or insurance, you'll get "killed" if you try to trade them.
I know that you think you understand what you thought I said, but I don't think you realize that what I said is necessarily what I meant......

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Re: Unrated municipal bonds

Post by jbolden1517 » Tue Aug 22, 2017 6:13 am

denovo wrote:
Tue Aug 22, 2017 2:11 am
Assume the markets are approximately rational. Interest rates reflect risk to capital. Go for investment-grade bonds. Take your risk on the equity side.
Sorry, but this is magical thinking. Price is only one degree of freedom. I can't borrow at bank interest rates, can't hold at the leverage they can, and at the same time am not subject to the same accounting standards they are. Bond market pricing can't be simultaneously be rational for both for me and a bank, its impossible. It can be irrational for both of us and it could in theory be rational for only one of us. But it can't be rational for both. If the bond market is perfectly priced for me, then I should be drastically overweighting financial stocks because those guys are going to be making money hand over fist.

To be honest I've never understood the theme here about "take the risk on the equity side". The bond market offers all sorts of risks that aren't available on the equity side (at least to the same degree). Why wouldn't I want to diversify my risk portfolio into those other risks?

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Re: Unrated municipal bonds

Post by jbolden1517 » Tue Aug 22, 2017 6:20 am

Sconie wrote:
Tue Aug 22, 2017 5:45 am
I've made some good money over the years purchasing small municipal issues. A few thoughts, in no particular order....
Yes please.
Sconie wrote:
Tue Aug 22, 2017 5:45 am
-Little communities pay their bills just like large ones do----(sometimes better)-----but frequently their issuances is so small that it doesn't pay for them to get the issue rated or insured.
Agree. And they often aren't facing the same pension fund messes...
Sconie wrote:
Tue Aug 22, 2017 5:45 am
-Stick to GOs and avoid revenue bonds
Could you elaborate on this? What goes wrong with revenue bonds? Obviously they default more, but it seems like investors are getting overcompensated for those defaults. That's what I'm trying to figure out. Your advice is the standard but I haven't been able to figure out why it is the standard advice.
Sconie wrote:
Tue Aug 22, 2017 5:45 am
-"Know" the communities that you are buying
How do you do this research?
Sconie wrote:
Tue Aug 22, 2017 5:45 am
-Buy them as new issues and be prepared to hold them to maturity. (I generally tried to stay in the 7-12 year maturity bracket.) As these bonds lack a rating or insurance, you'll get "killed" if you try to trade them.
If they trade way below new issue price why wouldn't I want to buy them after the new issuance when they trading much lower?

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Re: Unrated municipal bonds

Post by lazyday » Tue Aug 22, 2017 9:58 am

jbolden1517 wrote:
Tue Aug 22, 2017 6:13 am
To be honest I've never understood the theme here about "take the risk on the equity side". The bond market offers all sorts of risks that aren't available on the equity side (at least to the same degree). Why wouldn't I want to diversify my risk portfolio into those other risks?
It might not be safe to assume that we will be compensated for taking those risks.

Larry Swedroe has posted about research showing that overall portfolio risk and return has not benefited from credit risk, except perhaps in short term corporates.

David Swensen has argued against junk and corporates for the individual investor. Been too long since I've read Unconventional Success and I don't recall his reasons.

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Re: Unrated municipal bonds

Post by in_reality » Tue Aug 22, 2017 10:47 am

lazyday wrote:
Tue Aug 22, 2017 9:58 am
jbolden1517 wrote:
Tue Aug 22, 2017 6:13 am
To be honest I've never understood the theme here about "take the risk on the equity side". The bond market offers all sorts of risks that aren't available on the equity side (at least to the same degree). Why wouldn't I want to diversify my risk portfolio into those other risks?
It might not be safe to assume that we will be compensated for taking those risks.

Larry Swedroe has posted about research showing that overall portfolio risk and return has not benefited from credit risk, except perhaps in short term corporates.

David Swensen has argued against junk and corporates for the individual investor. Been too long since I've read Unconventional Success and I don't recall his reasons.
There is an interesting write up on it here https://blog.thinknewfound.com/2017/04/ ... t-premium/

There is also a reference to AQR research arguing that credit risk is rewarded but research methodology doesn't account for it properly and confuses it with term risk I think. https://papers.ssrn.com/sol3/papers.cfm ... id=2563482

This is just for the info. Not arguing anyone should take credit risk and expect a reward.

Corporate, munis ... same thing right!?!

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Re: Unrated municipal bonds

Post by lazyday » Tue Aug 22, 2017 2:25 pm

in_reality wrote:
Tue Aug 22, 2017 10:47 am
There is also a reference to AQR research arguing that credit risk is rewarded but research methodology doesn't account for it properly and confuses it with term risk I think. https://papers.ssrn.com/sol3/papers.cfm ... id=2563482
That paper claims that credit risk from corporates is worthwhile:
We find that the optimal weights across corporate bonds, government bonds and
equities are 48, 35 and 17 percent respectively over the 1936-2014 period.
Collectively, these results support the notion that (i) there is a risk premium to be had
from gaining exposure to credit risk, (ii) the credit risk premium is sufficiently different from
both the term and equity risk premium to be a valid diversifying source of returns
Here's Larry's response on etf.com to an earlier version of the paper: viewtopic.php?t=165365

in_reality wrote:
Tue Aug 22, 2017 10:47 am
Corporate, munis ... same thing right!?!
Larry also likes minimal credit risk in Munis, but I'm not sure he's discussed the research on that.

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Re: Unrated municipal bonds

Post by Valuethinker » Wed Aug 23, 2017 8:07 am

lazyday wrote:
Tue Aug 22, 2017 9:58 am

David Swensen has argued against junk and corporates for the individual investor. Been too long since I've read Unconventional Success and I don't recall his reasons.
The argument against corporate bonds is asymmetric information-- the management issue bonds when their equity is undervalued and/or when the market has awarded too high a credit rating (too low a yield spread over Treasuries) to the bonds. There is not alignment of interest between corporate bond investors and management (whereas there is, to a greater extent, in equity-- management work for shareholders not bondholders).

Junk I think again the risk is asymmetric. The default risk is either higher than the market thinks, or the equity underpriced (since many of the issuers are private, you can't simply buy the stock in the latter-- that's something of an argument for junk bonds).

It is observable that the yield gap from the bottom of IG (BBB-) to the top of junk is "too high". That's a function of the IG investors being forced to sell on downgrades/ not allowed to buy. It makes "quality junk" arguably underpriced (yield is better than you would expect from pure default probabilities). And the VG fund would be a good way to play that.

Conversely Original Issue junk (as opposed to "Fallen Angel") often has call provisions which allow repayment at par if upgraded to investment grade. That's not great for investors-- you lose the upside. The Option Adjusted Spread may or may not fully compensate you for that risk. One of the main reasons why Larry Swedroe doesn't like the bonds.

From a US tax point of view, junk bonds are pretty bad as I understand it.
Last edited by Valuethinker on Wed Aug 23, 2017 8:12 am, edited 1 time in total.

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Re: Unrated municipal bonds

Post by Valuethinker » Wed Aug 23, 2017 8:08 am

Generally closed end bond funds are interesting investments when there is a panic on. One does have to wait, patiently, for the panic.

I made big investments into the stock market on 26th August, 2008 -- so it appears from rereading my transactions history ;-).

Beware, therefore, catching the falling knife ;-).

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Re: Unrated municipal bonds

Post by Valuethinker » Wed Aug 23, 2017 8:10 am

jbolden1517 wrote:
Tue Aug 22, 2017 1:57 am
grabiner wrote:
Mon Aug 21, 2017 10:35 pm
jbolden1517 wrote:
Mon Aug 21, 2017 3:48 am
Moreover I've been frustrated several times that mutual funds "close to new investors" when they drop 20%+ during times of market turbulence.
I don't remember many examples of mutual funds closing to new investors when they fall; typically, when a fund falls, it has more withdrawals than deposits, so it wants new investors. More often, mutual funds close to new investors because they have problems handling inflows, which occurs when they rise. (This is not likely to happen with index funds, whether mutual funds or ETFs.)
Best example I can think of was the first time it happened to me. Heartland High-Yield Municipal Bond and Heartland Short-Duration Municipal. Funds dropped. There were outflows. Market was illiquid. Heartland had to mark the funds to market which dropped them 70%. I wanted to buy in if investors were panicked. SEC reversed my buy.

I think the fund was yielding over 18% tax free. I was furious with the SEC.
Is there not an "intermediate investor" categorization? There is in EU regulation. Allows you to invest in all sorts of things that you cannot, otherwise.

You need, from memory, 250k of liquid assets here, or a career which proves you are a market professional.

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Re: Unrated municipal bonds

Post by lazyday » Wed Aug 23, 2017 9:30 am

Valuethinker wrote:
Wed Aug 23, 2017 8:07 am
lazyday wrote:
Tue Aug 22, 2017 9:58 am

David Swensen has argued against junk and corporates for the individual investor. Been too long since I've read Unconventional Success and I don't recall his reasons.
The argument against corporate bonds is asymmetric information-- the management issue bonds when their equity is undervalued and/or when the market has awarded too high a credit rating (too low a yield spread over Treasuries) to the bonds. There is not alignment of interest between corporate bond investors and management (whereas there is, to a greater extent, in equity-- management work for shareholders not bondholders).
Ah, I had forgotten this.

He also likes the lack of conflict of interest between investors and the issuer when investing in government bonds of your home country.

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Re: Unrated municipal bonds

Post by jbolden1517 » Wed Aug 23, 2017 9:47 am

Valuethinker wrote:
Wed Aug 23, 2017 8:07 am
From a US tax point of view, junk bonds are pretty bad as I understand it.
Yes. Capital gains are taxed at a much lower rate than income. So converting principal into income is very expensive in the USA. Junk bonds structurally do this. This of course doesn't apply to tax advantaged accounts where you are indifferent which is why I think the anti-junk argument is too general. But I'd agree that for taxable money you want investment grade bonds or bonds likely to experience capital appreciation (i.e. the ones already in default being the best case).

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Re: Unrated municipal bonds

Post by Valuethinker » Wed Aug 23, 2017 11:03 am

jbolden1517 wrote:
Wed Aug 23, 2017 9:47 am
Valuethinker wrote:
Wed Aug 23, 2017 8:07 am
From a US tax point of view, junk bonds are pretty bad as I understand it.
Yes. Capital gains are taxed at a much lower rate than income. So converting principal into income is very expensive in the USA. Junk bonds structurally do this. This of course doesn't apply to tax advantaged accounts where you are indifferent which is why I think the anti-junk argument is too general. But I'd agree that for taxable money you want investment grade bonds or bonds likely to experience capital appreciation (i.e. the ones already in default being the best case).
Default strikes to me as the classic "in poker, if you cannot figure out who the mug is, you are the mug". There are a number of distressed debt specialists out there, with experienced people who are professionals in this market, as well as lawyers, accountants etc. They run institutional funds, hedge funds etc.

There are various funds (perhaps not accessible to US investors - -individual investors that is) who play in this space. However the fees are forbidding. The asset class is attractive in that it might have low correlation with other fixed income and perhaps even equities.

So if I made money in distressed securities, it would be a case of luck rather than good judgement-- it's an experts game.

Posters here made significant money by investing in junk bond funds in January-Mar 2009 when spreads were very high. Bill Bernstein on Efficient Frontier wrote a paper suggesting this as a strategy years before (when spreads are high enough). I was, here, much more cautious-- and wrong. I still think there was a realistic prospect, even in January 2009, that we could have repeated the Great Depression. The world economy was falling away that fast (a steeper fall in world trade than in 1931 in fact), and the main difference was the extraordinary stimulative measures adopted by Central Banks and by governments (bank bailout, fiscal policy stimulus etc.)- had Chrysler and GM entered bankruptcy, for example, things could have played out very differently due to the shock to (global) business and consumer confidence.

The lesson I derived from this is that you can make money from credit risk, but you need to be 1). patient (very) and 2). brave (very).

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Re: Unrated municipal bonds

Post by jbolden1517 » Wed Aug 23, 2017 10:44 pm

Valuethinker wrote:
Wed Aug 23, 2017 11:03 am
Default strikes to me as the classic "in poker, if you cannot figure out who the mug is, you are the mug". There are a number of distressed debt specialists out there, with experienced people who are professionals in this market, as well as lawyers, accountants etc. They run institutional funds, hedge funds etc.
No doubt. But there is a lot of bad debt to go around. When banks and foreign governments start playing then the buyers can own a percentage of the bond market.
Valuethinker wrote:
Wed Aug 23, 2017 11:03 am
There are various funds (perhaps not accessible to US investors - -individual investors that is) who play in this space. However the fees are forbidding. The asset class is attractive in that it might have low correlation with other fixed income and perhaps even equities.

So if I made money in distressed securities, it would be a case of luck rather than good judgement-- it's an experts game.
What makes you so certain that a passive strategy of just buying a bunch of randomish stuff wouldn't work?
Valuethinker wrote:
Wed Aug 23, 2017 11:03 am
Posters here made significant money by investing in junk bond funds in January-Mar 2009 when spreads were very high. Bill Bernstein on Efficient Frontier wrote a paper suggesting this as a strategy years before (when spreads are high enough). I was, here, much more cautious-- and wrong. I still think there was a realistic prospect, even in January 2009, that we could have repeated the Great Depression. The world economy was falling away that fast (a steeper fall in world trade than in 1931 in fact), and the main difference was the extraordinary stimulative measures adopted by Central Banks and by governments (bank bailout, fiscal policy stimulus etc.)- had Chrysler and GM entered bankruptcy, for example, things could have played out very differently due to the shock to (global) business and consumer confidence.

The lesson I derived from this is that you can make money from credit risk, but you need to be 1). patient (very) and 2). brave (very).
2008-9 was really rough with everything going down. Learned a lot about usually non-correlating vs. never non-correlating. But to use your poker analogy, poker lessons are expensive. I buy into bears all the time. When you are getting 4::1 when you hit you only gotta be right 2-in-5 to get a nice return.

Theoretical
Posts: 1070
Joined: Tue Aug 19, 2014 10:09 pm

Re: Unrated municipal bonds

Post by Theoretical » Thu Aug 24, 2017 4:46 pm

Posters here made significant money by investing in junk bond funds in January-Mar 2009 when spreads were very high. Bill Bernstein on Efficient Frontier wrote a paper suggesting this as a strategy years before (when spreads are high enough). I was, here, much more cautious-- and wrong. I still think there was a realistic prospect, even in January 2009, that we could have repeated the Great Depression. The world economy was falling away that fast (a steeper fall in world trade than in 1931 in fact), and the main difference was the extraordinary stimulative measures adopted by Central Banks and by governments (bank bailout, fiscal policy stimulus etc.)- had Chrysler and GM entered bankruptcy, for example, things could have played out very differently due to the shock to (global) business and consumer confidence.
I think if you want to capture this explicitly, passively, and systematically, the best vehicle is Van Eck's Fallen Angel ETF ANGL for the following reasons:

1. It rebalances monthly for its index, meaning it scoops up the downgrades and sends off the BBB upgrades.

2. It only has fallen angels (none of those silly speculative Tesla Bonds issued at par).

3. Because of 1 and 2, it is a very rough ride; however it's an inherently deep value strategy that gets deeper and broader the more a recession or panic goes on.

jbolden1517
Posts: 868
Joined: Sun Jul 09, 2017 2:53 pm

Re: Unrated municipal bonds

Post by jbolden1517 » Thu Aug 24, 2017 8:19 pm

Theoretical wrote:
Thu Aug 24, 2017 4:46 pm
I think if you want to capture this explicitly, passively, and systematically, the best vehicle is Van Eck's Fallen Angel ETF ANGL for the following reasons:

1. It rebalances monthly for its index, meaning it scoops up the downgrades and sends off the BBB upgrades.

2. It only has fallen angels (none of those silly speculative Tesla Bonds issued at par).

3. Because of 1 and 2, it is a very rough ride; however it's an inherently deep value strategy that gets deeper and broader the more a recession or panic goes on.
ANGL is a good suggestion for tax advantaged. I was thinking of this for taxable.

Theoretical
Posts: 1070
Joined: Tue Aug 19, 2014 10:09 pm

Re: Unrated municipal bonds

Post by Theoretical » Thu Aug 24, 2017 10:31 pm

From what I've read, their municipal high-yield is run by the same group and already has a positive record of being one of the first to get out of the Puerto Rico debacle.

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