Evaluating Munis beyond rating

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doneat53
Posts: 70
Joined: Tue Jul 04, 2017 1:23 pm

Evaluating Munis beyond rating

Post by doneat53 » Thu Aug 09, 2018 12:01 pm

I'm looking into buying some AA or better muni bonds.

Curious if there are other indicators of risk besides the S&P or Moody's rating?

For example ...

Date of last rating
Underlying rating
pay frequency...money in the bank if more frequent?
How do you feel about AA- or AA3 vs AA? Are these significant differences in risk?
other things to consider?

Thanks

doneat

Random Walker
Posts: 3298
Joined: Fri Feb 23, 2007 8:21 pm

Re: Evaluating Munis beyond rating

Post by Random Walker » Thu Aug 09, 2018 8:46 pm

I believe potential to be called is a biggie

Dave

Theoretical
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Re: Evaluating Munis beyond rating

Post by Theoretical » Fri Aug 10, 2018 12:51 am

1. State of issuance is huge. A Tennessee or Nebraska bond of the same rating and sector is usually going to be qualitatively superior to an Illinois or New Jersey one, and you’ll be able to tell by the difference in yield.

2. So is the sector. State GO bonds are safest historically, and so are road, sewer, and public school bonds. Industrial, stadium, and housing bonds are less so. This is subject to #1.

123
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Re: Evaluating Munis beyond rating

Post by 123 » Fri Aug 10, 2018 1:03 am

It's a red flag if you are contacted by a financial adviser that wants to sell you a muni. Generally the best munis will be bought by institutional investors. Issues that are not readily desired by institutional investors (including those that operate muni bond funds) will be offered to retail investors. Generally retail investors will pay a much higher mark-up for a muni bond versus an institutional investor because they purchase in small lots and require a lot more "salesmanship" to close a sale. Additionally a muni bond salesman selling to a retail investor knows there will be more post-sale contact due to investor questions and accordingly, opportunities for additional sales.
The closest helping hand is at the end of your own arm.

acegolfer
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Re: Evaluating Munis beyond rating

Post by acegolfer » Fri Aug 10, 2018 6:55 am

Ignore YTM. Instead, look at YTC (yield to call)

If you are not in the top income tax bracket, avoid munis.

jebmke
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Re: Evaluating Munis beyond rating

Post by jebmke » Fri Aug 10, 2018 7:59 am

acegolfer wrote:
Fri Aug 10, 2018 6:55 am
If you are not in the top income tax bracket, avoid munis.
So, income over $600K for MFJ?
When you discover that you are riding a dead horse, the best strategy is to dismount.

doneat53
Posts: 70
Joined: Tue Jul 04, 2017 1:23 pm

Re: Evaluating Munis beyond rating

Post by doneat53 » Fri Aug 10, 2018 6:53 pm

33% Federal income bracket so munis make a lot of sense for us.

So for these "additional" criteria (state, subject of bond, etc.) they are not included as part of the Moody or S&P rating?

Thanks for all the input. Just trying to get a feel for how people evaluate a muni purchase.

Random Walker
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Re: Evaluating Munis beyond rating

Post by Random Walker » Fri Aug 10, 2018 7:11 pm

Avoid munis from high tax states unless you live in those states. People who live in those states derive a bigger tax benefit than people not paying the in state taxes, thus prices get bid up higher.

Dave

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dratkinson
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Location: Centennial CO

Re: Evaluating Munis beyond rating

Post by dratkinson » Fri Aug 10, 2018 9:52 pm

Might want to research "death spiral" states for a list of states to avoid.



Read Swedroe's bond book, The Only Guide to a Winning Bond Strategy You'll Ever Need.

After reading Swedroe, I decided individual bonds were not for me---too much work, too many gotchas. I (and my heirs will) much prefer the simplicity of paying a bond fund manager to handle this.

If Vanguard (Fidelity,...) doesn't have a muni fund for your state, then you'll need to settle for a national muni fund/ETF, or do more due diligence to research acceptable single-state options.

Vanguard didn't have a Colorado muni fund, so I researched other single-state options.
"My Colorado muni bond fund": https://www.diehards.org/forum/viewtopi ... 1&t=197966

Reject all options that do not follow BH principles. Mix national/single-state funds/ETFs 50/50.

How has it worked out? So far, so good.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

mega317
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Re: Evaluating Munis beyond rating

Post by mega317 » Fri Aug 10, 2018 11:35 pm

I'm not looking forward to managing (hopefully a long way off) my dad's individual bonds.

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patrick013
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Re: Evaluating Munis beyond rating

Post by patrick013 » Sat Aug 11, 2018 12:33 pm

https://image.ibb.co/j46B39/staterankings2017.jpg

The above list is already a year old. Also, some states have pensions
that are greatly underfunded and that is a cause for concern when bond
payments need to be made by whatever govt. unit has that type of deficit.

Generally a AAA short term muni is very safe but diversification is also
good advise. Perhaps 10 different muni issues or more. Any bond portfolio
is better off with a number of different upper investment grade issues in
the whole portfolio. TRSY, Agency, Corp, and Muni's. Then look at AA
rated bonds.

Some muni's are rated higher than their underlying ratings because of
depth of support. A Finance Authority Housing muni may have a AAA rating
because the Fed, the State, and a local Development Foundation all have
budgeted and contributory support and allowances for the success of the
project, for example. More support than a small township building and
financing thru a muni issue a library or swimming pool project.

Or just get a Muni bond fund. VG has some with thousands of different
bonds for diversification.
age in bonds, buy-and-hold, 10 year business cycle

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

Re: Evaluating Munis beyond rating

Post by gmaynardkrebs » Sat Aug 11, 2018 12:58 pm

doneat53 wrote:
Thu Aug 09, 2018 12:01 pm
I'm looking into buying some AA or better muni bonds.
Curious if there are other indicators of risk besides the S&P or Moody's rating?
For example ...
Date of last rating
Underlying rating
pay frequency...money in the bank if more frequent?
How do you feel about AA- or AA3 vs AA? Are these significant differences in risk?
other things to consider?
The greatest risk is buying a muni recommended by your broker.

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