Muni Bond Funds With Regard to Puerto Rico

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Leesbro63
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Muni Bond Funds With Regard to Puerto Rico

Post by Leesbro63 » Thu Oct 05, 2017 10:01 am

I've been watching the news with regard to the increasing risk of Puerto Rico municipal bonds. And noticing that my Vanguard muni bond funds have been going up, despite the P.R. risk. So I guess there aren't much, if any, P.R. bonds in the Vanguard funds. I'm just wondering about this. You'd THINK that a place as big as Puerto Rico...sort of similar to one of the 50 states, for purposes of muni bond issuance...would be spooking the muni market. Yet the opposite is happening. So I'm just wondering about this.

foo.c
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by foo.c » Thu Oct 05, 2017 10:12 am

I wondered about that too. I think maybe they had such a bad credit rating that they were excluded from a lot of funds, but that is just a guess.

nordsteve
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by nordsteve » Thu Oct 05, 2017 10:25 am

The risk varies by fund.

Here's an example. I own a state-specific muni bond fund with about $530MM in assets. As of 3/31 it held about $2MM in PR bonds. Of that, about $600K is insured and the remainder was carried at 25-50% of principal amount. So the total at-risk amount is about 1.4MM, or 0.28% of the total fund assets.

rkhusky
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by rkhusky » Thu Oct 05, 2017 10:29 am

This document lists what percentage of dividends come from P.R. for Vanguard funds:

https://www.vanguard.com/pdf/INBST_012017.pdf

This document lists what the percentages of assets each fund holds:

http://www.vanguard.com/pdf/ASBST_012017.pdf

swimfin
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by swimfin » Thu Oct 05, 2017 10:31 am

The semi-annual report for the Vanguard Municipal Bond Fund dated April, 2017 shows the following:
The intermediate tax exempt bond fund has 0.1% of its portfolio in Puerto Rico bonds.
The short term tax exempt bond fund has no Puerto Rico bonds in its portfolio.

I did not search whether other tax exempt bond funds had any P.R. exposure.

ofckrupke
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by ofckrupke » Thu Oct 05, 2017 10:48 am

swimfin wrote:
Thu Oct 05, 2017 10:31 am
The semi-annual report for the Vanguard Municipal Bond Fund dated April, 2017 shows the following:
The intermediate tax exempt bond fund has 0.1% of its portfolio in Puerto Rico bonds.
The short term tax exempt bond fund has no Puerto Rico bonds in its portfolio.
The footnotes to these asset entries indicate that ALL are either insured or prerefunded, btw.

Paul K
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by Paul K » Thu Oct 05, 2017 10:55 am

Does Vanguard contract insurance on the bonds held in their funds? How do they decide whether the premium is a good deal and which bonds to insure?

jalbert
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by jalbert » Thu Oct 05, 2017 11:12 am

Recent events have affected Puerto Rican bond valuations:

https://www.cnbc.com/2017/10/04/puerto- ... -debt.html
Risk is not a guarantor of return.

psteinx
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by psteinx » Thu Oct 05, 2017 11:17 am

Paul K:

In general, muni bond insurance is not contracted by some portfolio manager who happens to own some risky muni bonds. Rather, it is a feature of the bond, at/before issuance. i.e. A risky issuer contracts with an insurer to insure the issuance, hopefully for a better rating and/or lower yield on the issuance. There may be outlier cases, but this is the norm, to my understanding. Note that insured newly issued munis have become rarer since roughly 2007 - the insurers themselves became troubled (more due to the mortgage crisis than P.R. woes), and the buying market, I guess, didn't attach sufficient value to muni insurance.

As for how Vanguard's managers determines what to buy? Presumably, in the same way as it does for other active funds - it perceives good value in the bonds it buys. Better yield for the risk, or lower risk for the same yield, or whatever. It requires analysis. Sometimes Vanguard uses outside portfolio managers - I'm not sure if this is the case for the tax exempt funds.

jalbert
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by jalbert » Thu Oct 05, 2017 11:32 am

Bond portfolio managers can buy credit default swaps on bonds they hold if they choose to. These don't have to be wrapped around the bond at initial issue. Munis often have insurance wrapped when the original issue is underwritten because individual investors usually hold a small enough number of them that credit risk would otherwise be undiversified and significantly uncompensated. Aggregating the risk with insurers enables this diversification of credit risk to occur at the insurers.
Risk is not a guarantor of return.

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Leesbro63
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by Leesbro63 » Thu Oct 05, 2017 4:24 pm

I am the OP. I guess part of my comment was just noticing that there doesn't seem to be any expected "contagion effect". That if P.R. bonds go, so might the bonds of other financially weak states. If anything, muni bonds have been rallying. This just seems odd to me. But hey, long live the power and safety of diversification.

clutchied
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by clutchied » Thu Oct 05, 2017 4:26 pm

CA tax law states that a muni bond has to be 50% CA before you can even deduct anything and then only at that percentage.

So CA muni bonds tend to be a bit more pure and have less of the islands mixed in.

just an observation.

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Leesbro63
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by Leesbro63 » Fri Oct 06, 2017 8:22 am

clutchied wrote:
Thu Oct 05, 2017 4:26 pm
CA tax law states that a muni bond has to be 50% CA before you can even deduct anything and then only at that percentage.

So CA muni bonds tend to be a bit more pure and have less of the islands mixed in.

just an observation.
What ARE you talking about? There are two types of municipal bond funds. State specific and ones that invest nationally in many states. A California municipal bond fund should have no bonds from other places; only from California. And national muni bond fund interest/dividends are generally are only deductible on state tax returns to the extent that it has bonds from that state. Vanguard often has 3 to 5% invested in Pennsylvania bonds. So you can only deduct on your Pennsylvania income tax return that percentage (generally 3% to 5%) of the total interest/dividend paid to you from the fund in that tax year. And yes, some states don't allow ANY deduction for national muni bond fund interest/dividends or require at least a "floor" via a certain percentage of the fund to be invested in bonds from that state. But what does any of this have to do with my question/comment about the potential of Puerto Rico, or any other state that gets into financial trouble, possibly spooking the overall muni bond market? Or in this case, my observation that in spite of the P.R. bond downgrades, the overall muni market has actually strengthened? Also wasn't there some big bond guru, a few years ago, predicting that muni bonds were going to become the next mine field? That hasn't happened either (at least so far).

clutchied
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by clutchied » Fri Oct 06, 2017 10:11 am

Leesbro63 wrote:
Fri Oct 06, 2017 8:22 am
clutchied wrote:
Thu Oct 05, 2017 4:26 pm
CA tax law states that a muni bond has to be 50% CA before you can even deduct anything and then only at that percentage.

So CA muni bonds tend to be a bit more pure and have less of the islands mixed in.

just an observation.
What ARE you talking about? There are two types of municipal bond funds. State specific and ones that invest nationally in many states. A California municipal bond fund should have no bonds from other places; only from California. And national muni bond fund interest/dividends are generally are only deductible on state tax returns to the extent that it has bonds from that state. Vanguard often has 3 to 5% invested in Pennsylvania bonds. So you can only deduct on your Pennsylvania income tax return that percentage (generally 3% to 5%) of the total interest/dividend paid to you from the fund in that tax year. And yes, some states don't allow ANY deduction for national muni bond fund interest/dividends or require at least a "floor" via a certain percentage of the fund to be invested in bonds from that state. But what does any of this have to do with my question/comment about the potential of Puerto Rico, or any other state that gets into financial trouble, possibly spooking the overall muni bond market? Or in this case, my observation that in spite of the P.R. bond downgrades, the overall muni market has actually strengthened? Also wasn't there some big bond guru, a few years ago, predicting that muni bonds were going to become the next mine field? That hasn't happened either (at least so far).
I was just trying to make a CA specific point. Re-reading my post it isn't as clear as I was hoping.

some CA muni bonds are not fully CA they also toss in some territories sometimes. That was the point I was trying to make.


Just a hold over from when I did taxes... we had to sometimes look up muni's to see what they were made of to see what we could deduct for the client.

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Leesbro63
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Re: Muni Bond Funds With Regard to Puerto Rico

Post by Leesbro63 » Fri Oct 06, 2017 10:24 am

clutchied wrote:
Fri Oct 06, 2017 10:11 am

I was just trying to make a CA specific point. Re-reading my post it isn't as clear as I was hoping.

some CA muni bonds are not fully CA they also toss in some territories sometimes. That was the point I was trying to make.


Just a hold over from when I did taxes... we had to sometimes look up muni's to see what they were made of to see what we could deduct for the client.
Ah! OK! Point taken!

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