2-year AA Munis at Vanguard and Fidelity Today

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Kevin M
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2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Thu Apr 12, 2018 4:38 pm

I just resumed buying munis in taxable after liquidating some no-penalty CDs at Ally, and thought I would share what I bought today and why.

I bought 15 RUSSELL CNTY ALA WTRAUTH WTR REV REF BDS02.00000% 02/0r1/2020 SER.2015, CUSIP 782391FF8, at 99.567/2.427%, which is 99.667/2.190% after commission, at Fidelity.

For me, at 27% federal and 8% state marginal tax rates, not itemizing, this is a taxable-equivalent yield (TEY) of 3.099%. This is compared to the 2.65% yield on the best new-issue 2-year brokered CDs, which is an example of what I've been buying in tax-advantaged (typically getting slightly higher yield on secondary market). Another point of comparison is 2-year Treasury at 2.34%, which for me is a TEY of 2.63% (so about the same as a 2-year CD in taxable).

Underlying rating of the bond is A, but insured rating is AA (S&P). So there's a bit of credit risk, but I consider default risk of AA at 2-year maturity as negligible. I think almost 40 bps of extra TEY over the Treasury makes the tiny bit of credit risk worth it.

As with CDs, the AA muni yield curve is relatively steep out to 2-year maturity, at almost 50 bps of extra yield for extending maturity from one year to two years, and then just barely steep enough to justify extending to three years, at about 25 bps of extra yield, but then it flattens out too much to justify extending beyond that, with only 18 bps per year for extending from 3-year to 5-year maturity. This is why I have more at about 2-year maturity than elsewhere, but do have some maturing out to about three years as well.

Also interesting is that this is another example of a non-CA bond offering higher TEY than a CA-bond at my CA state tax rate of 8%. Only about 20% of my muni ladder is in CA bonds. So it's easy to not over-concentrate in CA when I'm getting higher TEYs in other states. Best TEY I could find in a CA 2-year muni today was 2.786% (after commission).

Same quantity of same AL bond was available at Vanguard, as is often the case, but the price was a bit higher, which also is typical of what I've seen before. I didn't jot down the price, and there's no active ask quote now to view at Vanguard, but I think it was about 99.63/2.211%, so more than 20 bps lower yield. Late last year I started buying munis at Vanguard, but then discovered that Fidelity had better prices, so switched my muni buying over to Fidelity (already had accounts at both).

I love Vanguard for mutual funds, and they're comparable to Fidelity for CDs (sometimes a little better, sometimes a little worse, sometimes no difference), but Fidelity seems to have the edge in the secondary muni market. Don't know if Vanguard is adding a bit extra to the spread, or just isn't getting the same dealer pricing. Another advantage of Fidelity is that they charge $1 per bond regardless of account size, while Vanguard charges $2 if you have less than $500K of Vanguard assets, and $1 if that or more (Voyager Select or higher).

Kevin
Last edited by Kevin M on Sat Apr 14, 2018 8:27 pm, edited 1 time in total.
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by larryswedroe » Thu Apr 12, 2018 4:54 pm

great example of what I have been telling people for 20 plus years, there are significant advantages of building individual portfolios. While we won't buy A rated bonds, we won't sell if downgraded to A and 3 years or less to maturity as credit risk as you note is negligible if GO or essential services bond. Of course you want to diversify that risk.
Best
larry

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by jdb » Thu Apr 12, 2018 5:04 pm

Great to see Larry commenting again. His bond buying advice on this forum and in his books were invaluable to me in building a muni bond ladder a few years ago. Good to see your comments.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Thu Apr 12, 2018 5:30 pm

jdb wrote:
Thu Apr 12, 2018 5:04 pm
Great to see Larry commenting again. His bond buying advice on this forum and in his books were invaluable to me in building a muni bond ladder a few years ago. Good to see your comments.
:thumbsup

Larry was kind enough to answer some questions via PM/email about buying munis as I was just getting started late last year. My criteria are mostly based on what I learned from him in his posts and articles, although I don't completely ignore the insured rating. I started out buying only AAA, but as I read more of the reports on EMMA and looked more closely at default rates, I decided that AA was OK out to three year maturity.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Thu Apr 12, 2018 6:05 pm

Kevin M wrote:
Thu Apr 12, 2018 5:30 pm
jdb wrote:
Thu Apr 12, 2018 5:04 pm
Great to see Larry commenting again. His bond buying advice on this forum and in his books were invaluable to me in building a muni bond ladder a few years ago. Good to see your comments.
:thumbsup

Larry was kind enough to answer some questions via PM/email about buying munis as I was just getting started late last year. My criteria are mostly based on what I learned from him in his posts and articles, although I don't completely ignore the insured rating. I started out buying only AAA, but as I read more of the reports on EMMA and looked more closely at default rates, I decided that AA was OK out to three year maturity.

Kevin
Who is the insurer? Also, how risky do you think an "A" is if it's substantially longer term than the bonds you purchased? It sound's from Larry's comment, there might be some appreciable default risk.

Re Vanguard vs Fidelity, I have noticed that at Vanguard, the secondary Treasury orders go in as limit orders, and I almost always get a better price than the listed ask. That may close the gap somewhat with Fidelity, but I can't compare, since I don't have a trading account there.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by bayview » Thu Apr 12, 2018 7:24 pm

larryswedroe wrote:
Thu Apr 12, 2018 4:54 pm
great example of what I have been telling people for 20 plus years, there are significant advantages of building individual portfolios. While we won't buy A rated bonds, we won't sell if downgraded to A and 3 years or less to maturity as credit risk as you note is negligible if GO or essential services bond. Of course you want to diversify that risk.
Best
larry
Larry! (well, Mr. Swedrow :D)

Great to have you back. :beer
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Thu Apr 12, 2018 7:49 pm

gmaynardkrebs wrote:
Thu Apr 12, 2018 6:05 pm
Who is the insurer?
I don't investigate insurers, so it doesn't matter much to me. You an look up the bond on EMMA and see for yourself. Like I said, I'm OK if the insured rating is AA and maturity is three years or less.
Also, how risky do you think an "A" is if it's substantially longer term than the bonds you purchased? It sound's from Larry's comment, there might be some appreciable default risk.
You can do a web search and find a Moody's study of defaults from 1970-2011. Ten-year cumulative default rate of AAA was 0.00%, AA was 0.01%, and A was 0.04%. The 3-year cumulative default rates were 0.00% for AA and 0.01% for A. Here's a link to the report, but I think you need to sign up for a free membership to view it (I did): https://www.moodys.com/research/US-Muni ... PBC_140114. I haven't read the report carefully enough to determine if they look at only underlying rating or also insured rating, or if they even specify. There are several mentions of insurers in the report, some with respect to recovery rates (one example I see 100% recovery for insured, but less for uninsured).

Note that the time period covers the last financial crisis as well as a few years after, but as the report points out, we avoided a major depression, and the US government has avoided a debt crisis.

Also important to consider is that 63% of defaults were in housing and hospitals/health-care, so by just excluding these in your screens, which I usually do, you significantly reduce your default risk based on historical data.

Also, recovery rates have been quite high for muni defaults, so even with a default chances are good you'll get most if not all of your money eventually.

So, putting all of this together, the default risk of the munis I'm buying seems very small, but I do avoid having too much in any one municipality or state. Larry recommended no more than 35% in any one state, and my max is about 20% (in Texas, mostly AAA, mostly bought when I was getting started).
Re Vanguard vs Fidelity, I have noticed that at Vanguard, the secondary Treasury orders go in as limit orders, and I almost always get a better price than the listed ask. That may close the gap somewhat with Fidelity, but I can't compare, since I don't have a trading account there.
All secondary market orders are entered as limit orders by default, both at Vanguard and at Fidelity. Occasionally I'll get a better price than the limit ask, but usually not for munis, as they are much less liquid than Treasuries. If you get a better price for a Treasury, it might be because the ask price changed between the time you entered the order and when it was executed (this is kind of by definition). You will see ask prices changing for Treasuries during the day, but not so much for a specific muni offering.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Thu Apr 12, 2018 8:40 pm

Kevin,

I agree with your assessment on every level. I've bought munis for many years at both Vanguard and Fidelity, and Fidelity will often have a better selection. You can buy at auction with Fidelity as well, if you're every interested. Like you, Larry was extremely helpful in giving me confidence to do this when I first started out. The two things that were surprising to me: (1) you're right that you can sometimes do better out-of-state than in-state, and (2) you can often do better on the secondary market than at auction with the exact same maturity dates.

I doubt you'd have problems with an insured bond going out only two years. I personally try to buy only AA and above but for short-term bonds, your risk is minimal.

(And nice to see Larry posting.)

Good job.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Thu Apr 12, 2018 11:33 pm

Artsdoctor wrote:
Thu Apr 12, 2018 8:40 pm
Kevin,

I agree with your assessment on every level. I've bought munis for many years at both Vanguard and Fidelity, and Fidelity will often have a better selection. You can buy at auction with Fidelity as well, if you're every interested. Like you, Larry was extremely helpful in giving me confidence to do this when I first started out. The two things that were surprising to me: (1) you're right that you can sometimes do better out-of-state than in-state, and (2) you can often do better on the secondary market than at auction with the exact same maturity dates.

I doubt you'd have problems with an insured bond going out only two years. I personally try to buy only AA and above but for short-term bonds, your risk is minimal.

(And nice to see Larry posting.)

Good job.
I used to buy individual GO bonds, because I foolishly thought they were the state equivalent of Full Faith & Credit federal bonds. Now that I've discovered that the legal environment has changed, the GO guarantee is suspect. Default rates are extremely low now, but these things tend to happen in epidemics. Muni's are still safe on a relative basis, but the research is often murky, and disclosure requirements are inadequate. I would say also that after AMBAC and the rest, the insurance guarantee is at least open to question with many insurers. So until the day comes when I have enough investable funds to have a Larry Swedroe or Matt Fabian picking them for me, I've been sticking with the Vanguard funds. But, it sounds like you know what you are doing, and its pretty obvious that I do not.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Fri Apr 13, 2018 4:20 pm

gmaynardkrebs wrote:
Thu Apr 12, 2018 11:33 pm
I used to buy individual GO bonds, because I foolishly thought they were the state equivalent of Full Faith & Credit federal bonds. Now that I've discovered that the legal environment has changed, the GO guarantee is suspect. Default rates are extremely low now, but these things tend to happen in epidemics. Muni's are still safe on a relative basis, but the research is often murky, and disclosure requirements are inadequate. I would say also that after AMBAC and the rest, the insurance guarantee is at least open to question with many insurers. So until the day comes when I have enough investable funds to have a Larry Swedroe or Matt Fabian picking them for me, I've been sticking with the Vanguard funds. But, it sounds like you know what you are doing, and its pretty obvious that I do not.
You make some good points, and the Moody's report I referenced cautioned against complacency, noting that there have been structural changes in the debt landscape (my words), and that the causes of future defaults are likely to be different than the causes of past defaults.

Still, municipal bond ratings seem to have been pretty good with respect to predicting defaults, with the higher rated bonds having 0% or close to 0% defaults, and more so the shorter the term. Since the Moody's report indicates awareness of changes in likely causes of defaults, I'd hope that they continue their track record. So although I'm not complacent, I'm pretty comfortable with AA out to three years, whether it's the insured or underlying rating.

Today's purchase was 10 CALIFORNIA STATEWIDECMNTYS DE V AUTH REV05.00000% 04/01/2019 REV BDS KAISER PERMANENTE SER.2009A, CUSIP 130795E29, rated AA- by Moody's (not insured) at 103.140/1.673% net, which is TEY of 2.574% for me. Note that this is a CA bond, and although it is hospitals category (higher historical default rates), with only one year to maturity, and given that it's Kaiser and not some small hospital, I'm not too worried about default. I bought this particular maturity to fill a missing rung in my monthly 3-year muni/Treasury/CD ladder, and at this maturity the CA bond was higher TEY than the non-CA competition.

For comparison, a similar-maturity Treasury is one maturing 4/15/2019, with a yield of 2.089% for same quantity of 10, and for me this is a TEY of 2.35%. So I picked up a little more than 20 bps of TEY at 1-year maturity for taking the minimal credit risk of the muni. Either Treasury or Muni is higher TEY in taxable than new-issue 1-year CD at 2.10%.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Mydanyale » Fri Apr 13, 2018 5:11 pm

@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Fri Apr 13, 2018 5:37 pm

Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
He has bought a premium bond. He will get his money back in the forms of interest payments, and he'll amortize the bond accordingly.

When you're buying a municipal bond, you're going to want a premium bond or at least a discount de minimis bond. If your discount bond is beyond de minimis, you're going to pay regular income tax on the gain (not just a capital gain), so it's best to avoid them.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Fri Apr 13, 2018 6:02 pm

Artsdoctor wrote:
Fri Apr 13, 2018 5:37 pm
Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
He has bought a premium bond. He will get his money back in the forms of interest payments, and he'll amortize the bond accordingly.

When you're buying a municipal bond, you're going to want a premium bond or at least a discount de minimis bond. If your discount bond is beyond de minimis, you're going to pay regular income tax on the gain (not just a capital gain), so it's best to avoid them.
I do understand that your basis in the bond is reduced by the amortized bond premium reported on Form 1099-INT. That prevents you from claiming a capital loss. But, since there is no tax on the interest payments anyway, I assume the amortization has no other impact on your taxes. Is that correct? (Well, unless you are lucky enough to still be paying AMT in TY 2018.)

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Fri Apr 13, 2018 8:04 pm

gmaynardkrebs wrote:
Fri Apr 13, 2018 6:02 pm
Artsdoctor wrote:
Fri Apr 13, 2018 5:37 pm
Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
He has bought a premium bond. He will get his money back in the forms of interest payments, and he'll amortize the bond accordingly.

When you're buying a municipal bond, you're going to want a premium bond or at least a discount de minimis bond. If your discount bond is beyond de minimis, you're going to pay regular income tax on the gain (not just a capital gain), so it's best to avoid them.
I do understand that your basis in the bond is reduced by the amortized bond premium reported on Form 1099-INT. That prevents you from claiming a capital loss. But, since there is no tax on the interest payments anyway, I assume the amortization has no other impact on your taxes. Is that correct? (Well, unless you are lucky enough to still be paying AMT in TY 2018.)
The amortization is all about taxes.

Your cost basis is reduced, as you point out. But your interest income is also reduced by the amortization, which is key. So if your interest payment is $1,000 for the year and the amortization amount is $250, then you'd pay state income tax on only $750.

It also affects your IRMAA calculation if you're susceptible. Your Medicare premiums are based on your modified adjusted gross income, which includes tax-exempt income. However, that tax-exempt income is reduced by the yearly amortization amount. This is why you should even amortize your in-state bonds (one could argue that you don't need to amortize in-state bonds if you're not susceptible to IRMAA Medicare premium surcharges but I still do, since I'm approaching "that age").

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Mydanyale » Fri Apr 13, 2018 8:32 pm

How would amortization work in this case when the bonds are municipal and therefore, no state taxes will be paid for the interest?

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by hudson » Sat Apr 14, 2018 8:09 am

larryswedroe wrote:
Thu Apr 12, 2018 4:54 pm
great example of what I have been telling people for 20 plus years, there are significant advantages of building individual portfolios. While we won't buy A rated bonds, we won't sell if downgraded to A and 3 years or less to maturity as credit risk as you note is negligible if GO or essential services bond. Of course you want to diversify that risk.
Best
larry
Thanks again Larry!

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by hudson » Sat Apr 14, 2018 8:19 am

Kevin M wrote:
Thu Apr 12, 2018 5:30 pm
jdb wrote:
Thu Apr 12, 2018 5:04 pm
Great to see Larry commenting again. His bond buying advice on this forum and in his books were invaluable to me in building a muni bond ladder a few years ago. Good to see your comments.
:thumbsup

Larry was kind enough to answer some questions via PM/email about buying munis as I was just getting started late last year. My criteria are mostly based on what I learned from him in his posts and articles, although I don't completely ignore the insured rating. I started out buying only AAA, but as I read more of the reports on EMMA and looked more closely at default rates, I decided that AA was OK out to three year maturity.

Kevin
Kevin, I agree with you on the safety of AAA/AA munis. It seems like Vanguard's intermediate muni VWIUX doesn't quite make that standard....also Larry S's standard. Baird's intermediate muni BMBIX is very close to all AAA/AA. I'm interested in buying single state munis. Every time I look, I feel like I'm in way over my head. Is there any idiot-proof step by step method to evaluate the listing of munis. Are there any good places I can go to read more. Many thanks.
(Those very nice Penfed CDs that I learned about from you are expiring at the end of the year.)

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Sat Apr 14, 2018 8:51 am

hudson wrote:
Sat Apr 14, 2018 8:19 am
Kevin M wrote:
Thu Apr 12, 2018 5:30 pm
jdb wrote:
Thu Apr 12, 2018 5:04 pm
Great to see Larry commenting again. His bond buying advice on this forum and in his books were invaluable to me in building a muni bond ladder a few years ago. Good to see your comments.
:thumbsup

Larry was kind enough to answer some questions via PM/email about buying munis as I was just getting started late last year. My criteria are mostly based on what I learned from him in his posts and articles, although I don't completely ignore the insured rating. I started out buying only AAA, but as I read more of the reports on EMMA and looked more closely at default rates, I decided that AA was OK out to three year maturity.

Kevin
Kevin, I agree with you on the safety of AAA/AA munis. It seems like Vanguard's intermediate muni VWIUX doesn't quite make that standard....also Larry S's standard. Baird's intermediate muni BMBIX is very close to all AAA/AA. I'm interested in buying single state munis. Every time I look, I feel like I'm in way over my head. Is there any idiot-proof step by step method to evaluate the listing of munis. Are there any good places I can go to read more. Many thanks.
(Those very nice Penfed CDs that I learned about from you are expiring at the end of the year.)
I'm not Kevin, but the company where Matt Fabian works (google him) is the best I've found. They used to put out a newsletter, but I am not sure if they still do. But beyond the specific securities he discusses, it's tough. As I noted, there is very little disclosure, and the unwillingness of Warren Buffet to enter the muni insurance market after the AMBAC fiasco tells you all you need to know about how challenging it is to research munis. Obviously, there are some issuers, like Virginia, I believe, that are good as gold. But the yields are going to be low for anything that safe. Most unknowable of all is political risks -- taxpayers revolts, state pensioners, corrupt local officials -- which are not going to get better. Meredith Whitney was simply right too early, I fear. I really do think that going with an advisor like Larry for individual bonds, and a low cost mutual fund for the rest is the way to go.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by hudson » Sat Apr 14, 2018 9:27 am

Thanks gmaynardkrebs!

I'm not interested in using an advisor. I just want to learn the ropes. I would be buying NC munis to avoid paying state taxes. I would only go for AAA/AA munis. I may start out very small and follow Kevin's lead...3 years or less. If you want to learn, sometimes, you have to test the water.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by aqan » Sat Apr 14, 2018 9:30 am

Kevin M wrote:
Thu Apr 12, 2018 4:38 pm

For me, at 27% federal and 8% state marginal tax rates, not itemizing, this is a taxable-equivalent yield (TEY) of 3.099%. This is compared to the 2.65% yield on the best new-issue 2-year brokered CDs, which is an example of what I've been buying in tax-advantaged (typically getting slightly higher yield on secondary market). Another point of comparison is 2-year Treasury at 2.34%, which for me is a TEY of 2.63% (so about the same as a 2-year CD in taxable).
Does it make sense for someone itemizes and pays AMT to invest in munis? Someone told me that you lose tax advantage when you pay AMT.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by welderwannabe » Sat Apr 14, 2018 10:13 am

Some munis are subject to AMT and some arent. Usually the 'private activity municipal bonds' are the ones you have to watch out for. They are often for sports stadiums and the like. I believe some hospital bonds can fall into this category.

Regular GO munis you should be all set.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Theoretical » Sat Apr 14, 2018 10:32 am

Also, road, school, water & sewer, and other essential infrastructure type revenue bonds are very good choices as well.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 14, 2018 12:22 pm

Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
The yield to maturity calculation factors in both the change in value of the bond from time of purchase to maturity (capital return) and the coupon payments (income return). The magnitude of the positive income return will be larger than that of the negative capital return, so the yield is positive.

Here's a simplified way of looking at it that ignores the time value of money, the small amount of accrued interest (that the seller of the bond got), and the fact that maturity is slightly less than one year.

The coupon rate of the bond is 5%, so for the $10,000 of face value I bought,I will receive $500 in coupon payments in the approximately one year to maturity. Since I paid 103.14 (including commission), the initial value is $10,314, and since the bond matures at 100 ($10,000), the capital return component is -$314. So the net dollar return is 500 - 314 = 186. Using this simplified model, the return is 186 / 10,314 = 1.80%.

Here's a more accurate calculation. The accrued interest (paid to seller) was $22.22, so subtracting this from the $500 in coupon payments leaves 477.78 as the actual income component, and net dollar return is 477.78 - 314 = 163.78. This gives me a net return of 1.59%. The actual maturity of the bond is about 11.5 months, so annualized return is increased to 1.59% / 11.5 * 12 = 1.66%.

The yield calculated with the spreadsheet YIELD function is 1.673%, which is a smidge higher than the simplified calculation, since the discounted value of the first coupon payment is higher than if it were received at the end of the term. This can be verified by changing the frequency parameter (coupon payments per year) in the YIELD function from 2 to 1, which then gives a yield of 1.66%.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 14, 2018 12:47 pm

Artsdoctor wrote:
Fri Apr 13, 2018 5:37 pm
When you're buying a municipal bond, you're going to want a premium bond or at least a discount de minimis bond. If your discount bond is beyond de minimis, you're going to pay regular income tax on the gain (not just a capital gain), so it's best to avoid them.
I don't believe this is correct--at least without some further qualification. The premium or discount is accrued annually, and is subtracted (premium) or added (discount) from/to the annual coupon payments to determine the net annual income. Since this is an in-state muni, there will be no state tax or federal tax on the net income.

Of course there still is no federal income tax on out of state muni income, but there is state income tax, so the premium/discount accrual impact on net income does matter for state income tax.

The qualification is that you can end up paying income tax on a discounted muni if the bond was sold at a discount originally, and if the discounted price you pay is less than indicated by the accrual schedule provided in the offering document. Fidelity displays a warning to this effect when buying a muni bond at a discount online. I've bought a few at a discount, but in each case, the discounted price I paid was higher than indicated in the accrual schedule, so no income tax. The first time I did so, I roughly calculated what I thought the accrual schedule price would be, then I called the Fidelity fixed-income desk to verify that I was paying more than this, and he looked it up on his system and verified that I was OK.

Since I plan to hold all munis to maturity, I don't worry about impact of premium/discount accrual on capital gain taxation.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 14, 2018 12:55 pm

Mydanyale wrote:
Fri Apr 13, 2018 8:32 pm
How would amortization work in this case when the bonds are municipal and therefore, no state taxes will be paid for the interest?
There is no state income tax on bonds issued by your state of residence, but there is state income tax on muni bonds issued by other states.

So for an in-state muni, the accrual of premium or discount is only relevant if you sell before maturity, since the accrual affects your basis. If held to maturity, there is no impact on taxation of an in-state bond.

For an out of state bond, the accrual is combined with the coupon payments to determine net income for state income tax purposes.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Iliketoridemybike » Sat Apr 14, 2018 1:00 pm

Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
You don’t understand bonds.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Sat Apr 14, 2018 1:17 pm

aqan wrote:
Sat Apr 14, 2018 9:30 am
Kevin M wrote:
Thu Apr 12, 2018 4:38 pm

For me, at 27% federal and 8% state marginal tax rates, not itemizing, this is a taxable-equivalent yield (TEY) of 3.099%. This is compared to the 2.65% yield on the best new-issue 2-year brokered CDs, which is an example of what I've been buying in tax-advantaged (typically getting slightly higher yield on secondary market). Another point of comparison is 2-year Treasury at 2.34%, which for me is a TEY of 2.63% (so about the same as a 2-year CD in taxable).
Does it make sense for someone itemizes and pays AMT to invest in munis? Someone told me that you lose tax advantage when you pay AMT.
Under the new tax law, unless your household income is in the $1M range, the AMT is gone -- at last.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Sat Apr 14, 2018 1:38 pm

Kevin M wrote:
Sat Apr 14, 2018 12:47 pm
Artsdoctor wrote:
Fri Apr 13, 2018 5:37 pm
When you're buying a municipal bond, you're going to want a premium bond or at least a discount de minimis bond. If your discount bond is beyond de minimis, you're going to pay regular income tax on the gain (not just a capital gain), so it's best to avoid them.
I don't believe this is correct--at least without some further qualification. The premium or discount is accrued annually, and is subtracted (premium) or added (discount) from/to the annual coupon payments to determine the net annual income. Since this is an in-state muni, there will be no state tax or federal tax on the net income.

Of course there still is no federal income tax on out of state muni income, but there is state income tax, so the premium/discount accrual impact on net income does matter for state income tax.

The qualification is that you can end up paying income tax on a discounted muni if the bond was sold at a discount originally, and if the discounted price you pay is less than indicated by the accrual schedule provided in the offering document. Fidelity displays a warning to this effect when buying a muni bond at a discount online. I've bought a few at a discount, but in each case, the discounted price I paid was higher than indicated in the accrual schedule, so no income tax. The first time I did so, I roughly calculated what I thought the accrual schedule price would be, then I called the Fidelity fixed-income desk to verify that I was paying more than this, and he looked it up on his system and verified that I was OK.

Since I plan to hold all munis to maturity, I don't worry about impact of premium/discount accrual on capital gain taxation.

Kevin
You'll find this helpful (I hope):

http://www.investinginbonds.com/learnmo ... ubcatid=60

This may be a little clearer:

http://bondsandfixedincome.com/tax-exem ... -discount/

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Mydanyale » Sat Apr 14, 2018 2:12 pm

Kevin M wrote:
Sat Apr 14, 2018 12:22 pm
Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
The yield to maturity calculation factors in both the change in value of the bond from time of purchase to maturity (capital return) and the coupon payments (income return). The magnitude of the positive income return will be larger than that of the negative capital return, so the yield is positive.

Here's a simplified way of looking at it that ignores the time value of money, the small amount of accrued interest (that the seller of the bond got), and the fact that maturity is slightly less than one year.

The coupon rate of the bond is 5%, so for the $10,000 of face value I bought,I will receive $500 in coupon payments in the approximately one year to maturity. Since I paid 103.14 (including commission), the initial value is $10,314, and since the bond matures at 100 ($10,000), the capital return component is -$314. So the net dollar return is 500 - 314 = 186. Using this simplified model, the return is 186 / 10,314 = 1.80%.

Here's a more accurate calculation. The accrued interest (paid to seller) was $22.22, so subtracting this from the $500 in coupon payments leaves 477.78 as the actual income component, and net dollar return is 477.78 - 314 = 163.78. This gives me a net return of 1.59%. The actual maturity of the bond is about 11.5 months, so annualized return is increased to 1.59% / 11.5 * 12 = 1.66%.

The yield calculated with the spreadsheet YIELD function is 1.673%, which is a smidge higher than the simplified calculation, since the discounted value of the first coupon payment is higher than if it were received at the end of the term. This can be verified by changing the frequency parameter (coupon payments per year) in the YIELD function from 2 to 1, which then gives a yield of 1.66%.

Kevin
Thank you for the explanation. It seems that I was wrong.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Mydanyale » Sat Apr 14, 2018 2:14 pm

gmaynardkrebs wrote:
Sat Apr 14, 2018 1:17 pm
aqan wrote:
Sat Apr 14, 2018 9:30 am
Kevin M wrote:
Thu Apr 12, 2018 4:38 pm

For me, at 27% federal and 8% state marginal tax rates, not itemizing, this is a taxable-equivalent yield (TEY) of 3.099%. This is compared to the 2.65% yield on the best new-issue 2-year brokered CDs, which is an example of what I've been buying in tax-advantaged (typically getting slightly higher yield on secondary market). Another point of comparison is 2-year Treasury at 2.34%, which for me is a TEY of 2.63% (so about the same as a 2-year CD in taxable).
Does it make sense for someone itemizes and pays AMT to invest in munis? Someone told me that you lose tax advantage when you pay AMT.
Under the new tax law, unless your household income is in the $1M range, the AMT is gone -- at last.
Hallelujah

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Mydanyale » Sat Apr 14, 2018 2:15 pm

Iliketoridemybike wrote:
Sat Apr 14, 2018 1:00 pm
Mydanyale wrote:
Fri Apr 13, 2018 5:11 pm
@Kevin

Re: Kaiser bonds
I hope you do realize that you bought the bonds above par, and upon maturity in a year, in total return, you will be losing money.
You don’t understand bonds.
Apparently not. Thank you for your comment.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 14, 2018 3:01 pm

hudson wrote:
Sat Apr 14, 2018 8:19 am
Kevin, I agree with you on the safety of AAA/AA munis. It seems like Vanguard's intermediate muni VWIUX doesn't quite make that standard....also Larry S's standard. Baird's intermediate muni BMBIX is very close to all AAA/AA. I'm interested in buying single state munis. Every time I look, I feel like I'm in way over my head. Is there any idiot-proof step by step method to evaluate the listing of munis. Are there any good places I can go to read more. Many thanks.
(Those very nice Penfed CDs that I learned about from you are expiring at the end of the year.)
I'm sure you can find more guidance by searching the web. I just started with what I learned from Larry, asked him a few questions via email/PM, and called the Vanguard or Fidelity fixed-income desk when there was something I didn't fully understand. I also check EMMA, and scan anything of interest there, particularly any recent continuing disclosures. Fidelity provides links to the latest municipal reports from the ratings agencies, and I'll sometimes scan those if they're recent.
hudson wrote:
Sat Apr 14, 2018 9:27 am
I'm not interested in using an advisor. I just want to learn the ropes. I would be buying NC munis to avoid paying state taxes. I would only go for AAA/AA munis. I may start out very small and follow Kevin's lead...3 years or less. If you want to learn, sometimes, you have to test the water.
As mentioned, I often find higher taxable equivalent yields (TEYs) with out of state munis, so I have about 31% in CA bonds in my brokered muni/Treasury/CD ladder, and that includes about 15% in the CA muni MM fund (which I'm using as my 0-year benchmark), so I only have about 16% in individual CA munis. The ladder also includes 3.5% in a brokered CD and 6.4% in Treasuries.

So I would also consider non-NC munis and Treasuries for your ladder. I would include CDs too if the yields were high enough, but in the current environment that's unlikely unless an exceptional direct CD deal comes along. The goal is not to not pay state income tax, but to earn the highest TEY with acceptable credit risk and sufficient diversification. Being able to earn higher TEYs from out of state munis and even Treasuries helps diversifying beyond your home state without sacrificing return.

As I mentioned, when I started out, I was buying only AAA munis, and at the time TX often had the highest TEYs for AAA in 2-3 year maturities (I also was buying at Vanguard until I discovered that Fidelity had consistently better pricing). As I read more and my comfort level increased, I lowered my search criteria to minimum Aa3/AA- for 2-year or less maturity, and Aa2/AA for 3-year maturity.

I always exclude housing and usually exclude hospitals due to the much higher historical default rates, and because there often are extraordinary redemptions (ER) for housing. I include call protection (CP) and sinking-fund protection (SFP) in my search criteria. The Fidelity search results screen shows all of these attributes in a column at the far right. Other attributes displayed are GO or R (revenue), I (if insured), AMT (subject to alternative minimum tax), ME (material event), and a few others.

Almost all munis have ME, but this usually is just due to filing of financials or something like that, but it could be a rating change. At Fidelity you can click on the ME attribute to see a brief summary of the MEs, and you can click through to EMMA to see the details if you want. So it's worth a quick look, but ME is not something to worry about in itself.

AMT is set to No by default in the search criteria at Fidelity, and I leave it that way.

IL tends to have the highest yields for AA bonds, and I assume this is because of the financial distress in that state. Once I reached a certain level of IL holdings, I started excluding IL bonds from consideration. They currently comprise 12% of my holdings. After CA, TX is my second-highest concentration, with 15.5% (again, including CA muni MM, CDs and Treasuries as well as munis), and these are all rated AAA by Moody's or S&P, and most by both; as mentioned, these were bought when I was sticking with AAA while getting my feet wet.

As I believe Larry has pointed out in the past, the highest yields often are for the smallest quantities, like 5 or 10. I assume that institutional investors are getting dealer pricing so get better pricing on large quantities, but I don't know how this works--maybe Larry can chime in on this.

I usually look at recent trades to be sure I'm getting a fair price. You can see this at Fidelity by clicking on the View link in the search results, and you also can view it for any muni at EMMA. You can see customer buy and sell prices, as well as dealer to dealer prices. It's interesting to see that sometimes a larger quantity was purchased earlier in the day or a few days ago at a higher price than currently being asked for the smaller quantity.

I sometimes have purchased a Treasury for the ladder, since once I exclude IL and the attributes I don't want in a muni, the Treasury at the particular maturity I'm looking for has the highest TEY. The longest-maturity Treasury I bought was one maturing on 10/31/2020.

As mentioned, I've been building a monthly ladder, mostly in the 4-month to 3-year range, but I have a few AAA bonds maturing in about four years that I bought early on. The intention is to use proceeds from maturing bonds, in addition to coupon payments, to fund residual living expenses, and then to roll the excess into bonds at the long end of the ladder, or wherever the yield curve looks best at the time.

There's a big bulge in the ladder at the 21-23 month maturity rungs, since beyond this the yield curve becomes less steep. Just looking at the Fidelity yields summary page (which I pull into a spreadsheet automatically), I see 59 bps of TEY for extending from 0-year to 1-year (using current CA MM TEY of 2.09% as 0-year TEY), 59 bps for extending from 1-year to 2-years, 27 bps for extending from 2-year to 3-year, and 13 bps per year for extending from 3-year to 5-year maturity. So you get the most reward/risk for extending maturity to about two years, and IMO, not enough to justify extending beyond three years.

However, the yields provided by Fidelity in this table are likely to be for bonds I wouldn't buy, e.g., because they are IL or have extraordinary redemptions. For example, currently they show 2.31% for AA 2-year maturity, but that's for an IL bond. The next-best yield is for an MI GO/CP/SFP bond rated AA- at 2.202%, so I'd probably take a look at that one, but there are only 5 available. Still, pulling the Fidelity Yield summary results into a spreadsheet is a quick way to get a sense of the CD, Treasury and muni yield curves. I chart them to get a quick visual sense, then look at the details in the table I build from the Fidelity yields. I evaluate all yields in TEY terms for taxable accounts.

There are missing rungs in this brokered ladder at 5, 8, 9 and 10 months, because I have direct CDs in taxable maturing around then (actually closer to 6, 8, 9 and 10), the ones at 8-10 months being the PenFed 5-year 3% CDs you mentioned, and the earlier ones are the 3-year CDs at 3.05% from NWFCU.

Hope this is useful info, and glad to answer whatever questions I can, although I certainly don't consider myself a muni expert.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Sat Apr 14, 2018 3:15 pm

Kevin, does Fidelity let you place a limit order below ask?

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Sat Apr 14, 2018 3:30 pm

^ I would strongly urge avoiding IL bonds. Even the state's general obligation bonds are rated BBB-, which is really getting down there. And a state cannot declare bankruptcy! It has been drilled into my head that bonds are for safety and the few bucks you're going to pick up with IL bonds are just not worth it, in my opinion. Others can certainly disagree.

Larry Swedroe has given many of us extraordinarily helpful information, especially in the fixed income world. He is extremely conservative when it comes to credit risk and would not buy anything less than AA rated individual munis, and there are at least eight states that he avoids altogether. He is famous for saying that "it takes an awful lot of interest to make up for lost principal" among many other pearls of wisdom.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Sat Apr 14, 2018 3:39 pm

Artsdoctor wrote:
Sat Apr 14, 2018 3:30 pm
^ I would strongly urge avoiding IL bonds. Even the state's general obligation bonds are rated BBB-, which is really getting down there. And a state cannot declare bankruptcy! It has been drilled into my head that bonds are for safety and the few bucks you're going to pick up with IL bonds are just not worth it, in my opinion. Others can certainly disagree.

Larry Swedroe has given many of us extraordinarily helpful information, especially in the fixed income world. He is extremely conservative when it comes to credit risk and would not buy anything less than AA rated individual munis, and there are at least eight states that he avoids altogether. He is famous for saying that "it takes an awful lot of interest to make up for lost principal" among many other pearls of wisdom.
At a certain price, even IL bonds might make sense. But the price will always be too high, because fleecing mom & pop muni investors is the time-honored method by which Wall Streeters put their kids through Wharton.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Sat Apr 14, 2018 4:30 pm

^ This will depend on your investment philosophy.

Interest rates were very, very low for many years. Many of us learned during that time to "suck it up" and accept yields for what they were. That doesn't mean that we weren't hurt in the learning process because it's incredibly tempting to squeeze every cent out of a fixed income investment with those ridiculous yields.

I have no problem taking plenty of risk on the equity side. I had many years where I invested in corporate bonds and even dabbled in junk bond funds; however, that mix wasn't right for me and I've kept my fixed income side very conservative.

Everyone has a price, to be sure. Certainly plenty of people thought Puerto Rico bonds were priced low enough to justify buying them. However, for me, my bonds are a safe haven and it's just not worth it for me to go further down the credit ladder to get a few more dollars. All of that said, everyone will have their own arbitrary line on what "safety" actually means; it's just that I would argue that you have to understand what you're investing in to adequately assess what that risk might be.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 14, 2018 4:34 pm

gmaynardkrebs wrote:
Sat Apr 14, 2018 3:15 pm
Kevin, does Fidelity let you place a limit order below ask?
Yes, but the one time I tried recently for a muni, the order was cancelled within a few minutes.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Kevin M » Sat Apr 14, 2018 5:17 pm

Artsdoctor wrote:
Sat Apr 14, 2018 3:30 pm
^ I would strongly urge avoiding IL bonds. Even the state's general obligation bonds are rated BBB-, which is really getting down there. And a state cannot declare bankruptcy! It has been drilled into my head that bonds are for safety and the few bucks you're going to pick up with IL bonds are just not worth it, in my opinion. Others can certainly disagree.
I would not buy a bond rated BBB-, none of the IL bonds I've bought were rated below AA-, and 41% are rated AAA by either Moody's or S&P or both. Of the IL bonds rated less than AAA, 80% mature in a year or less. The cumulative 3-year default rate for 1970-2011 for bonds rated above A by Moody's is 0.00%.

Vanguard's second largest single holding in the limited-term tax-exempt fund is an IL GO bond. I find an IL GO bond with similar maturity, 11/2018, and coupon, 5%, and it's rated A2/AA-; this is one of my IL holdings.
Larry Swedroe has given many of us extraordinarily helpful information, especially in the fixed income world. He is extremely conservative when it comes to credit risk and would not buy anything less than AA rated individual munis, and there are at least eight states that he avoids altogether. He is famous for saying that "it takes an awful lot of interest to make up for lost principal" among many other pearls of wisdom.
Of course you, Larry and others may want to use stricter criteria than I do, but I'm OK with a limited percent of my muni bonds in IL. I seem to recall Larry saying at one point that they avoid CA bonds too, but I'm certainly not going to exclude them completely as a CA resident. Like I said, I've now excluded IL from my new purchases to avoid having too much concentration in IL. If I include my CA muni funds (int-term and long-term), I have MUCH more concentration in CA than in any other state.

I follow Larry's advice about AA or higher (if you consider AA- as AA), but I'm OK if that's the insured rating (Larry only considers underlying), and if it's rated that by at least one of the agencies (I don't require all). I don't completely exclude any states, but I certainly don't want too much in any one state, other than perhaps CA.

I'm certainly not recommending that anyone use the same criteria as I do--just sharing it. I'm not even recommending that anyone else buy individual munis, but just sharing some of my reasons for doing so.

Kevin
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by hudson » Sat Apr 14, 2018 5:34 pm

Kevin M wrote:
Sat Apr 14, 2018 3:01 pm

Fidelity provides links to the latest municipal reports from the ratings agencies, and I'll sometimes scan those if they're recent.

(I also was buying at Vanguard until I discovered that Fidelity had consistently better pricing).

The Fidelity search results screen shows all of these attributes in a column at the far right.

AMT is set to No by default in the search criteria at Fidelity, and I leave it that way.

I usually look at recent trades to be sure I'm getting a fair price. You can see this at Fidelity by clicking on the View link in the search results, and you also can view it for any muni at EMMA.

However, the yields provided by Fidelity in this table are likely to be for bonds I wouldn't buy, e.g., because they are IL or have extraordinary redemptions. For example, currently they show 2.31% for AA 2-year maturity, but that's for an IL bond. The next-best yield is for an MI GO/CP/SFP bond rated AA- at 2.202%, so I'd probably take a look at that one, but there are only 5 available. Still, pulling the Fidelity Yield summary results into a spreadsheet is a quick way to get a sense of the CD, Treasury and muni yield curves. I chart them to get a quick visual sense, then look at the details in the table I build from the Fidelity yields. I evaluate all yields in TEY terms for taxable accounts.

Kevin
Thanks again Kevin!! Looks like I need to strongly consider opening a Fidelity Brokerage account. I also need to find EMMA...that wasn't hard: https://emma.msrb.org/

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Sat Apr 14, 2018 5:54 pm

^ Kevin: I think there's a misunderstanding. I was referring to the State of Illinois General Obligation bonds; the state has a BBB- credit rating. You're not going to find a State of Illinois General Obligation bond with an AA rating.

https://www.reuters.com/article/us-illi ... SKBN1A22C0

Having an IL GO bond in a muni fund which holds thousands of bonds is nearly insignificant. It's when you're holding the individual muni alone that creates significant risk.

Remember that ratings are assigned when the bond is issued. There are many bonds which are never re-evaluated. Consequently, you may be thinking you're buying an AA-rated bond but if that rating was assigned in 2001, you need to be aware of that. Obviously, bonds from big issuers that are more frequently traded are re-assessed more frequently; EMMA will give you all of that information.

I can't think of a state with more financial woes than IL at the current time. Christine Benz (Morningstar, based in Chicago) jokingly said she wouldn't go near an IL bond with a 10-foot pole and Larry was even trying to get his daughter to move out at one point!

You're right about California, though. Years ago when I was learning from Larry about muni nuts and bolts, he was not crazy about buying CA bonds because the state had only an A rating. He felt that diversifying some of that risk away in the form of a CA muni bond fund would help although I really couldn't pass up some of those state GO and essential service revenue bonds because the TEY was too enticing. However, the state now has an AA rating so I don't think even he would argue (though I have not communicated with him on this).

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Sat Apr 14, 2018 6:09 pm

Is everyone here distinguishing between state level GO, as opposed to local or municipal GO? I could be wrong, but my recollection is that in some states, counties and municipalities can issue GOs, which are general obligations of the localities, as opposed to the state. I think this is a significant difference.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Sat Apr 14, 2018 6:21 pm

^ Absolutely. General obligationbonds can be state, county, city, town, village, etc. The credit rating can be extremely varied as well (between state, county, city, etc.). The one difference in the whole equation is that states cannot declare bankruptcy like non-state entities. However, that doesn't mean that there is no way for a state or any other entity to have a default, which can entail just being late on a payment versus missing several.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by hudson » Sat Apr 14, 2018 6:25 pm

I got a guest account at Fidelity for 30 days...easy.
The first NC muni I came to is here...you've got to have a Fidelity account or a guest account to follow this link I suspect...

https://fixedincome.fidelity.com/ftgw/f ... renceName=

The site wouldn't give me the CUSIP....so I couldn't ask EMMA.
How would you evaluate this bond....it looks like it's paying 5%.

Many thanks!

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by gmaynardkrebs » Sat Apr 14, 2018 6:29 pm

hudson wrote:
Sat Apr 14, 2018 6:25 pm
I got a guest account at Fidelity for 30 days...easy.
The first NC muni I came to is here...you've got to have a Fidelity account or a guest account to follow this link I suspect...

https://fixedincome.fidelity.com/ftgw/f ... renceName=

The site wouldn't give me the CUSIP....so I couldn't ask EMMA.
How would you evaluate this bond....it looks like it's paying 5%.

Many thanks!
If it's actually paying 5% tax free currently (as opposed to at issuance), the one thing I can tell you about it without even looking is that it's risky.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Iliketoridemybike » Sat Apr 14, 2018 6:30 pm

hudson wrote:
Sat Apr 14, 2018 6:25 pm
I got a guest account at Fidelity for 30 days...easy.
The first NC muni I came to is here...you've got to have a Fidelity account or a guest account to follow this link I suspect...

https://fixedincome.fidelity.com/ftgw/f ... renceName=

The site wouldn't give me the CUSIP....so I couldn't ask EMMA.
How would you evaluate this bond....it looks like it's paying 5%.

Many thanks!
The coupon is 5%. It’s yield to maturity is much less at about 1.6% and yield to worst, if called is under 1%. It’s AA1 rated. Those are the numbers you need to evaluate it on.
Last edited by Iliketoridemybike on Sat Apr 14, 2018 6:37 pm, edited 1 time in total.

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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Iliketoridemybike » Sat Apr 14, 2018 6:34 pm

gmaynardkrebs wrote:
Sat Apr 14, 2018 6:29 pm
hudson wrote:
Sat Apr 14, 2018 6:25 pm
I got a guest account at Fidelity for 30 days...easy.
The first NC muni I came to is here...you've got to have a Fidelity account or a guest account to follow this link I suspect...

https://fixedincome.fidelity.com/ftgw/f ... renceName=

The site wouldn't give me the CUSIP....so I couldn't ask EMMA.
How would you evaluate this bond....it looks like it's paying 5%.

Many thanks!
If it's actually paying 5% tax free currently (as opposed to at issuance), the one thing I can tell you about it without even looking is that it's risky.
You say that without even looking at it. Just based on this thread, Bogleheads in general do not understand bonds.

Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Iliketoridemybike » Sat Apr 14, 2018 6:45 pm

Kevin M wrote:
Sat Apr 14, 2018 4:34 pm
gmaynardkrebs wrote:
Sat Apr 14, 2018 3:15 pm
Kevin, does Fidelity let you place a limit order below ask?
Yes, but the one time I tried recently for a muni, the order was cancelled within a few minutes.

Kevin
You must have entered as a “fill or kill”. If done for the day, they would have left it open until market close.

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Artsdoctor
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Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Artsdoctor » Sat Apr 14, 2018 6:54 pm

Iliketoridemybike wrote:
Sat Apr 14, 2018 6:34 pm
gmaynardkrebs wrote:
Sat Apr 14, 2018 6:29 pm
hudson wrote:
Sat Apr 14, 2018 6:25 pm
I got a guest account at Fidelity for 30 days...easy.
The first NC muni I came to is here...you've got to have a Fidelity account or a guest account to follow this link I suspect...

https://fixedincome.fidelity.com/ftgw/f ... renceName=

The site wouldn't give me the CUSIP....so I couldn't ask EMMA.
How would you evaluate this bond....it looks like it's paying 5%.

Many thanks!
If it's actually paying 5% tax free currently (as opposed to at issuance), the one thing I can tell you about it without even looking is that it's risky.
You say that without even looking at it. Just based on this thread, Bogleheads in general do not understand bonds.
For the most part, Bogleheads are going to be buying fixed income mutual funds. Vanguard has done several white papers comparing and contrasting funds versus individual bonds, and they make a good argument for using funds. There could be place for individual bonds but it's a lot of work to buy individual bonds properly, treasuries notwithstanding. It's a bit of a bother to assess a muni bond correctly, the bookkeeping isn't intuitive, and the tax implications in a taxable account need to be considered--and it's beyond what most people want to get in to. During the accumulation years, I don't see how investors would come out ahead by buying individual bonds but that's just my opinion.

The bond in question may indeed have a coupon of 5%. It's a premium bond and if the yield to maturity is under 2%, the premium is going to be high. But that's another conversation altogether.

Iliketoridemybike
Posts: 572
Joined: Wed Jun 28, 2017 11:03 am

Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by Iliketoridemybike » Sat Apr 14, 2018 7:03 pm

Artsdoctor wrote:
Sat Apr 14, 2018 6:54 pm
Iliketoridemybike wrote:
Sat Apr 14, 2018 6:34 pm
gmaynardkrebs wrote:
Sat Apr 14, 2018 6:29 pm
hudson wrote:
Sat Apr 14, 2018 6:25 pm
I got a guest account at Fidelity for 30 days...easy.
The first NC muni I came to is here...you've got to have a Fidelity account or a guest account to follow this link I suspect...

https://fixedincome.fidelity.com/ftgw/f ... renceName=

The site wouldn't give me the CUSIP....so I couldn't ask EMMA.
How would you evaluate this bond....it looks like it's paying 5%.

Many thanks!
If it's actually paying 5% tax free currently (as opposed to at issuance), the one thing I can tell you about it without even looking is that it's risky.
You say that without even looking at it. Just based on this thread, Bogleheads in general do not understand bonds.
For the most part, Bogleheads are going to be buying fixed income mutual funds. Vanguard has done several white papers comparing and contrasting funds versus individual bonds, and they make a good argument for using funds. There could be place for individual bonds but it's a lot of work to buy individual bonds properly, treasuries notwithstanding. It's a bit of a bother to assess a muni bond correctly, the bookkeeping isn't intuitive, and the tax implications in a taxable account need to be considered--and it's beyond what most people want to get in to. During the accumulation years, I don't see how investors would come out ahead by buying individual bonds but that's just my opinion.

The bond in question may indeed have a coupon of 5%. It's a premium bond and if the yield to maturity is under 2%, the premium is going to be high. But that's another conversation altogether.
I have tried to educate, in many threads, about the advantages of holding individual bonds in a ladder in a rising rate environment, but to no avail. The Bogle way is about simplicity and I get that. There are times though when other ways are better, but small voices get drowned out here. And I think your comment about the premium is exactly what the earlier poster asked about. No?

hudson
Posts: 1486
Joined: Fri Apr 06, 2007 9:15 am

Re: 2-year AA Munis at Vanguard and Fidelity Today

Post by hudson » Sat Apr 14, 2018 7:11 pm

Artsdoctor wrote:
Sat Apr 14, 2018 6:54 pm
The bond in question may indeed have a coupon of 5%. It's a premium bond and if the yield to maturity is under 2%, the premium is going to be high. But that's another conversation altogether.
Your insight is appreciated!
I do not understand how the yield can go from 5% to 2%.

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