Larry Swedroe: Munis Increasingly Risky

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am
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Re: Larry Swedroe: Munis Increasingly Risky

Post by am »

bck63 wrote: Fri Apr 10, 2020 1:31 pm
am wrote: Fri Apr 10, 2020 1:28 pm
patriciamgr2 wrote: Fri Apr 10, 2020 1:06 pm I'd also love to hear from Mr. Swedroe or others at BAM concerning their current views on muni's.
Can someone who knows his email or contact info have him comment here about current views? I believe I’ve seen him comment recently on other issues. Thanks.
He is no longer contributing on Bogleheads, as I recall.
Last post was Jan 19, 2020.
bck63
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Re: Larry Swedroe: Munis Increasingly Risky

Post by bck63 »

am wrote: Fri Apr 10, 2020 1:34 pm
bck63 wrote: Fri Apr 10, 2020 1:31 pm
am wrote: Fri Apr 10, 2020 1:28 pm
patriciamgr2 wrote: Fri Apr 10, 2020 1:06 pm I'd also love to hear from Mr. Swedroe or others at BAM concerning their current views on muni's.
Can someone who knows his email or contact info have him comment here about current views? I believe I’ve seen him comment recently on other issues. Thanks.
He is no longer contributing on Bogleheads, as I recall.
Last post was Jan 19, 2020.
Correct. Almost four months ago. And it was announced on here by (I believe) Rick Ferri that Mr. Swedroe would no longer be contributing on Bogleheads.

Edit: Per Mr. Ferri this is not correct. I did see a post but it wasn't Rick Ferri and I wasn't able to locate the post. I apologize for the error.
Last edited by bck63 on Tue Apr 14, 2020 3:13 pm, edited 1 time in total.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by fredflinstone »

Swedroe has been totally vindicated.
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Re: Larry Swedroe: Munis Increasingly Risky

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fredflinstone wrote: Fri Apr 10, 2020 2:55 pm Swedroe has been totally vindicated.
He's why I moved all my fixed income to treasuries.
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Random Walker
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Re: Larry Swedroe: Munis Increasingly Risky

Post by Random Walker »

DFMPX is the DFA Municipal Bond Portfolio. I think it has an average maturity and quality very similar to the individual municipal bond ladders that Larry’s firm builds for clients. According to the DFA site DFMPX has average maturity 3.76 years and holdings are 43.42% AAA, 55.03% AA, 1.55% A. Year to date the fund is up 0.2% according to Yahoo Finance.

Dave
Last edited by Random Walker on Fri Apr 10, 2020 8:59 pm, edited 1 time in total.
WolfgangPauli
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Re: Larry Swedroe: Munis Increasingly Risky

Post by WolfgangPauli »

I am sure this will start an entire discussion of "moral Hazard" but the Fed has just played its hand. It will not let the Muni market die:

https://seekingalpha.com/article/433454 ... -be-enough
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Re: Larry Swedroe: Munis Increasingly Risky

Post by Angst »

bck63 wrote: Fri Apr 10, 2020 3:11 pm
fredflinstone wrote: Fri Apr 10, 2020 2:55 pm Swedroe has been totally vindicated.
He's why I moved all my fixed income to treasuries.
He's why I bought PCRIX and QSPIX.
Just kidding, I love Larry, but it's ixnay on the IX-plays for me.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by am »

WolfgangPauli wrote: Fri Apr 10, 2020 8:53 pm I am sure this will start an entire discussion of "moral Hazard" but the Fed has just played its hand. It will not let the Muni market die:

https://seekingalpha.com/article/433454 ... -be-enough
Maybe that Whitney prediction of mass defaults will finally come through after all? If this crisis doesn’t do it, then nothing will.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by typical.investor »

Angst wrote: Fri Apr 10, 2020 8:55 pm
bck63 wrote: Fri Apr 10, 2020 3:11 pm
fredflinstone wrote: Fri Apr 10, 2020 2:55 pm Swedroe has been totally vindicated.
He's why I moved all my fixed income to treasuries.
He's why I bought PCRIX and QSPIX.
Just kidding, I love Larry, but it's ixnay on the IX-plays for me.
And how do you think LENDX is going to do? Peer-to-Peer lending seems a little worrisome right now.

Larry rescinded all these things in his “Correction Protection in Liquid Alts”.
Investors can also consider using the alternatives I will discuss to replace safe bond investments. Doing so would create a portfolio with significantly higher forward-looking expected returns while its estimated volatility would rise only slightly, though term/inflation risk would be significantly reduced.
Personally, I am more willing to use munis that those financial engineering plays.

In general, I think advisors are more prone to suggest things they can sell.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by Angst »

typical.investor wrote: Fri Apr 10, 2020 10:03 pmAnd how do you think LENDX is going to do? Peer-to-Peer lending seems a little worrisome right now.
I've chosen not to follow it so I really have no opinion. I've simplified things over time. I'm sticking with stocks and bonds, including SCV, Int'l SC, Treasuries, TIPS and savings bonds and rebalancing to the IPS when appropriate. I don't need muni's.
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Random Walker
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Re: Larry Swedroe: Munis Increasingly Risky

Post by Random Walker »

LENDX is down about 2.2% ytd. It just made an about 1% distribution and per Yahoo Finance price is down 3.2%. LENDX invests directly in short duration small business, student, and I think personal loans. Stone Ridge, I believe, keeps the credit quality of the borrowers quite high. One potential big hit to the fund is an unexpected spike in unemployment. This pandemic is practically the definition of that. I’m happy LENDX has only lost the small amount it has. Prior to that it was performing nicely.

Dave
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Re: Larry Swedroe: Munis Increasingly Risky

Post by typical.investor »

Valuethinker wrote: Wed Nov 21, 2018 4:40 am
vineviz wrote: Tue Nov 20, 2018 2:23 pm
Valuethinker wrote: Tue Nov 20, 2018 1:54 pm
vineviz wrote: Tue Nov 20, 2018 1:30 pm I’m not saying that the risks that people are mentioning aren’t real, nor that they might possibly manifest in a default crisis of some sort.

Instead, I’m saying that imagining a crisis is only really actionable if we have some estimate of both the likelihood and magnitude of such a crisis. Even if the next crisis was an order of magnitude greater that the worst previous crisis, I don’t see how investors in investment-grade municipalities are going to find their portfolios significantly affected.
You are using past default rates to forecast future default rates? Hence my underlined bits. BTW an order of magnitude is 10x ;-).
Yeah, when I said "order of magnitude" I meant that quite literally.

According to Moody's: "The five-year municipal default rate since 2007 was 0.15%, compared to 0.07% for the entire study period (1970-2016)."

What is the probability that an imminent municipal bond default crisis leads to default rates 10x an already-elevated 0.15%? Maybe 10%? Or possibly 25%? Is it as high as 50%?

Since 1970, the average rate of recovery from defaulted municipal bonds has been been about 66% (again according to Moody's). What is the probability that future recovery rates are half of historic rates (i.e. 33%)? Let's say that IF the default crisis occurs, there's a 50% chance of getting the historic recovery and 50% chance of recovery getting cut in half.

Now we're talking about a worst-case "municipal black swan" event that will cost investors somewhere between 0.25% and 0.75% of their municipal bond holdings on average.

Would this be a a big deal to gurus and portfolio managers? You betcha. Would it be a big deal to the typical investor? I hardly think so. Even if an investor was 50% in munincipal bonds, they are much more likely to be impacted by steel tariffs or Brexit than by pension funding levels in Illinois or New Jersey.

It's certainly possible that investors who are highly concentrated in certain issuers would be disproportionately hurt, and if this scary story helps frighten them into undertaking the diversification that (frankly) they should have known they needed already then all the better.
Thank you for putting numbers to your thoughts.

I haven't looked up the size of different state (and combined with local government) municipal bond issues. So I don't know how much of a fund would be at risk in a default. The other issue, shades of the CDO problem, is that state defaults would not be uncorrelated (somebody is going to whisper "Gaussian copula" at this point ;-)). Thus, historic default data might not be useful in such a situation.

I know that there are state specific muni bond funds, and that that correlates with how US tax law works for individuals?

Therefore I conclude there is a degree of risk exposure.

I quite accept for a nationally diversified investor this might not be a big risk.

But isn't the whole point of municipal bonds in the US that you avoid your state taxes?
I think you misunderstand US taxation and perhaps shouldn't comment on US municipals until you do.

Municipal Bonds can be Federal and state tax free for residents of the issuing state. If in a fund, it's only state tax free if the fund is primarily in that state's bonds.

Municipal Bonds are generally Federal tax free as well.

So no, the whole point point of municipal bonds is not to only use your state's. Yes, it has additional tax advantages, but that should be balanced against concentration risk particularly for those in less financially stable states.

And for those without income tax on investments, a national fund is as good tax wise as a state's but with increased diversification.

I realize this was an old thread but it popped up again recently and I noticed your comment then.
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Random Walker
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Re: Larry Swedroe: Munis Increasingly Risky

Post by Random Walker »

One advantage of a municipal bond ladder is that it can be tailored to an individual’s tax situation. If an individual lives in a high tax state, he will want some munis offered by that state and he will need to balance the tax benefit versus diversification. If he does not live in a high tax state, he will want to avoid munis from high tax states. Investors living in high tax states tend to bid up the prices of their state’s own municipal bonds. If you don’t live in a high tax state, best to buy the municipal bonds of low tax (or no tax) states.

Dave
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Re: Larry Swedroe: Munis Increasingly Risky

Post by vineviz »

typical.investor wrote: Sun Apr 12, 2020 12:21 am Municipal Bonds can be Federal and state tax free for residents of the issuing state. If in a fund, it's only state tax free if the fund is primarily in that state's bonds.

Municipal Bonds are generally Federal tax free as well.
+1

Just to clarify a bit, a subset of municipal bonds are fully taxable at the federal level. And a subset of THESE are also taxable at the state & local level.

I own a handful of zero-coupon taxable municipal bonds in an IRA.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by Rick Ferri »

bck63 wrote: Fri Apr 10, 2020 2:41 pm
am wrote: Fri Apr 10, 2020 1:34 pm
bck63 wrote: Fri Apr 10, 2020 1:31 pm
am wrote: Fri Apr 10, 2020 1:28 pm
patriciamgr2 wrote: Fri Apr 10, 2020 1:06 pm I'd also love to hear from Mr. Swedroe or others at BAM concerning their current views on muni's.
Can someone who knows his email or contact info have him comment here about current views? I believe I’ve seen him comment recently on other issues. Thanks.
He is no longer contributing on Bogleheads, as I recall.
Last post was Jan 19, 2020.
Correct. Almost four months ago. And it was announced on here by (I believe) Rick Ferri that Mr. Swedroe would no longer be contributing on Bogleheads.
Nope. That's news to me.

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gmaynardkrebs
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

Larry has said he's happy to answer PMs, and of course, he still writes his great columns on Advisorperspectives.com.
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steve roy
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Re: Larry Swedroe: Munis Increasingly Risky

Post by steve roy »

Just bailed on our munis in taxable. Better more taxes than losses. Treasuries for us.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

steve roy wrote: Mon Apr 13, 2020 9:43 am Just bailed on our munis in taxable. Better more taxes than losses. Treasuries for us.
Probably as good a time as any if you're of that mind, since munis have pretty much recovered, and you won't take much of a loss, if any. Good idea that you waited a bit.

However, I must say that the number of BHers who have posted about dumping their munis has me thinking I should add to my position. The main reason I have not is that the yields have come down again. Perhaps, on munis, BHers are not representative of the overall market sentiment.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by watchnerd »

I got rid of my intermediate munis last fall.

But I just swapped my Treasury MM fund for a Muni MM fund now that the Fed is backstopping muni MM.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by hudson »

am wrote: Fri Apr 10, 2020 11:34 am A more specific question is if BMBIX is now partially taxable?
The old part of this discussion brought that up, but I never have seen anything definitive.
I speculate that nothing has changed, because I haven't heard anything since.
I vote that BMBIX owners pay no federal taxes....for what it's worth.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by hudson »

I looked up pre-refunded and taxes and found this:
Under the new law, interest on advance refunding bonds—refunding bonds issued more than 90 days before the redemption or call date of the refunded bonds—will now be taxable. Interest on current refunding bonds—refunding bonds issued within 90 days or less of the redemption or call date of the refunded bonds—will remain tax-exempt.
https://www.bkd.com/article/2018/03/tax ... -refunding

From the above, it looks like pre-refunded munis can still be tax-exempt.

From Baird's BMBIX Fund Current Fact Sheet:
The primary investment objective of the Fund
is to seek current income that is substantially
exempt from federal income tax.
A secondary
objective is to seek total return with relatively
low volatility of principal.
https://content.rwbaird.com/BairdFunds/ ... -sheet.pdf

I speculate that BMBIX's 45% pre-refunded munis are federally tax exempt.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

watchnerd wrote: Mon Apr 13, 2020 10:07 am I got rid of my intermediate munis last fall.

But I just swapped my Treasury MM fund for a Muni MM fund now that the Fed is backstopping muni MM.
So on $100K, let's say the difference is roughly $1000 pre tax, and $666 after tax. Not sure it's worth it for me. As far as I can tell, the the so-called Fed backstop is not the functional equivalent of an FDIC guarantee. It's a liquidity facility only, not a guarantee of the $1 NAV, as it was in 2008. For safe money, $666 per $100K really isn't enough to get me back into the muni mmf.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by am »

gmaynardkrebs wrote: Mon Apr 13, 2020 9:58 am
steve roy wrote: Mon Apr 13, 2020 9:43 am Just bailed on our munis in taxable. Better more taxes than losses. Treasuries for us.
Probably as good a time as any if you're of that mind, since munis have pretty much recovered, and you won't take much of a loss, if any. Good idea that you waited a bit.

However, I must say that the number of BHers who have posted about dumping their munis has me thinking I should add to my position. The main reason I have not is that the yields have come down again. Perhaps, on munis, BHers are not representative of the overall market sentiment.
I’ve had second thoughts about dumping munis since fed stepped in and infused liquidity into the muni market and provided loans to large municipalities. But I’ve settled on being content with dumping them.

The fed can only do so much and can’t rescue every troubled bond and municipality. The current conditions are the worst in decades and there is no end in sight. We are not getting back to normal until there is a vaccine and effective therapeutics.

The current muni yields reflect this added risk. Look a the current spreads between treasuries and muni yields, I want my bonds and fixed income to be very safe and not volatile. I don’t want to risk my money for such a low reward.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by watchnerd »

gmaynardkrebs wrote: Mon Apr 13, 2020 10:38 am
watchnerd wrote: Mon Apr 13, 2020 10:07 am I got rid of my intermediate munis last fall.

But I just swapped my Treasury MM fund for a Muni MM fund now that the Fed is backstopping muni MM.
So on $100K, let's say the difference is roughly $1000 pre tax, and $666 after tax. Not sure it's worth it for me. As far as I can tell, the the so-called Fed backstop is not the functional equivalent of an FDIC guarantee. It's a liquidity facility only, not a guarantee of the $1 NAV, as it was in 2008. For safe money, $666 per $100K really isn't enough to get me back into the muni mmf.
Are you concerned about principle loss in the long term or just breaking the buck as a short term fluctuation?
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

watchnerd wrote: Mon Apr 13, 2020 1:40 pm
gmaynardkrebs wrote: Mon Apr 13, 2020 10:38 am
watchnerd wrote: Mon Apr 13, 2020 10:07 am I got rid of my intermediate munis last fall.

But I just swapped my Treasury MM fund for a Muni MM fund now that the Fed is backstopping muni MM.
So on $100K, let's say the difference is roughly $1000 pre tax, and $666 after tax. Not sure it's worth it for me. As far as I can tell, the the so-called Fed backstop is not the functional equivalent of an FDIC guarantee. It's a liquidity facility only, not a guarantee of the $1 NAV, as it was in 2008. For safe money, $666 per $100K really isn't enough to get me back into the muni mmf.
Are you concerned about principle loss in the long term or just breaking the buck as a short term fluctuation?
Mostly I am concerned about losing access to my cash if they impose some type of exit gate due to panic withdrawals. I doubt the vanguard muni fund would actually lose more than a negligible amount, if any. The risk is quite remote, but the absence of Fed guarantee is enough to dissuade me. Now, if muni mms were paying 3%, as they did a week or so ago, that would be a diffferent story.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by ballons »

am wrote: Mon Apr 13, 2020 1:32 pm I’ve had second thoughts about dumping munis since fed stepped in and infused liquidity into the muni market and provided loans to large municipalities. But I’ve settled on being content with dumping them.

The fed can only do so much and can’t rescue every troubled bond and municipality. The current conditions are the worst in decades and there is no end in sight. We are not getting back to normal until there is a vaccine and effective therapeutics.

The current muni yields reflect this added risk. Look a the current spreads between treasuries and muni yields, I want my bonds and fixed income to be very safe and not volatile. I don’t want to risk my money for such a low reward.
Yes, they can. Unlimited QE means unlimited QE.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by JackoC »

typical.investor wrote: Sun Apr 12, 2020 12:21 am
Valuethinker wrote: Wed Nov 21, 2018 4:40 am
But isn't the whole point of municipal bonds in the US that you avoid your state taxes?
I think you misunderstand US taxation and perhaps shouldn't comment on US municipals until you do.

Municipal Bonds can be Federal and state tax free for residents of the issuing state. If in a fund, it's only state tax free if the fund is primarily in that state's bonds.

Municipal Bonds are generally Federal tax free as well.
I'd just note the bold part depends on the state. A few states require the fund to be primarily in-state to exclude any of the interest from income tax by that state, but most allow you to exclude whatever portion is from your state. For example for me the income from VMLUX was 'only' 94.46% subject to NJ income tax last year: the 5.54% of income from NJ bonds was exempt from NJ tax. I enter it as if two different funds, VMLUX-NJ and VMLUX-non-NJ.

Like you and others said, there are various other exceptions but the great majority of income from conventional national muni bond funds is covered by: federal tax exempt, subject to state tax.

As I think I've been consistent saying in threads before and after the latest trouble, I don't like longer term muni bonds (or funds) because in a big enough crisis they will tend to become correlated with riskier assets. Same reason I'd never rely on muni's for *most* of my safe money. Baird's concept of super high quality muni bond funds might be attractive if their ER's weren't so high. OTOH I thought before and still do that the price fluctuations and risk of a shorter fund like VMLUX (with an economical ER) are tolerable for a limited portion of safe money (VMLUX is around 29% of my 'safe' assets). But that's a judgement call. Others could be less or more worried about muni risk and it might be reasonable. But muni's are significantly further from 'ideal risklessness' than federal debt or gteed (such as via FDIC) instruments.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

ballons wrote: Mon Apr 13, 2020 2:57 pm
am wrote: Mon Apr 13, 2020 1:32 pm I’ve had second thoughts about dumping munis since fed stepped in and infused liquidity into the muni market and provided loans to large municipalities. But I’ve settled on being content with dumping them.

The fed can only do so much and can’t rescue every troubled bond and municipality. The current conditions are the worst in decades and there is no end in sight. We are not getting back to normal until there is a vaccine and effective therapeutics.

The current muni yields reflect this added risk. Look a the current spreads between treasuries and muni yields, I want my bonds and fixed income to be very safe and not volatile. I don’t want to risk my money for such a low reward.



Yes, they can. Unlimited QE means unlimited QE.
I don't believe the Fed has been given the authority to buy directly the bonds of most municipalities, or to purchase directly or indirectly below investment grade muni bonds. The purchases are also limited to shorter durations, and certain budget criteria. So in that sense QE, has limitations with regard to aiding states and municipalities.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by ballons »

gmaynardkrebs wrote: Mon Apr 13, 2020 3:42 pm I don't believe the Fed has been given the authority to buy directly the bonds of most municipalities, or to purchase directly or indirectly below investment grade muni bonds. The purchases are also limited to shorter durations, and certain budget criteria. So in that sense QE, has limitations with regard to aiding states and municipalities.
https://www.barrons.com/articles/the-fe ... 1586524201

The Fed’s program, called the municipal liquidity facility, can directly buy up to $500 billion in municipal bonds from states, cities with more than one million people, and counties with more than two million people. That means the program isn’t open to most local governments as there are only 10 cities and 16 counties in the U.S. that meet the Fed’s criteria. Each muni-bond issuer must obtain Fed approval to use the facility, and states can ask the Fed to lift their borrowing caps on behalf of smaller municipalities and other entities that are ineligible.

State and local governments will be able to sell only bonds maturing in two years or less to the Fed. Each transaction’s pricing will depend on the credit rating of the state or municipal government at the time of the bonds’ purchase, according to the central bank’s term sheet.
New SPV does just that.
https://www.federalreserve.gov/newseven ... 00409a.htm

The Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

All of the facilities mentioned above are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
Fed saying more can be on the way if needed including expanding to all muni debt and duration. Fed states they have the authority and only need the Treasury to approve.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by am »

ballons wrote: Mon Apr 13, 2020 4:06 pm
gmaynardkrebs wrote: Mon Apr 13, 2020 3:42 pm I don't believe the Fed has been given the authority to buy directly the bonds of most municipalities, or to purchase directly or indirectly below investment grade muni bonds. The purchases are also limited to shorter durations, and certain budget criteria. So in that sense QE, has limitations with regard to aiding states and municipalities.
https://www.barrons.com/articles/the-fe ... 1586524201

The Fed’s program, called the municipal liquidity facility, can directly buy up to $500 billion in municipal bonds from states, cities with more than one million people, and counties with more than two million people. That means the program isn’t open to most local governments as there are only 10 cities and 16 counties in the U.S. that meet the Fed’s criteria. Each muni-bond issuer must obtain Fed approval to use the facility, and states can ask the Fed to lift their borrowing caps on behalf of smaller municipalities and other entities that are ineligible.

State and local governments will be able to sell only bonds maturing in two years or less to the Fed. Each transaction’s pricing will depend on the credit rating of the state or municipal government at the time of the bonds’ purchase, according to the central bank’s term sheet.
New SPV does just that.
https://www.federalreserve.gov/newseven ... 00409a.htm

The Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

All of the facilities mentioned above are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
Fed saying more can be on the way if needed including expanding to all muni debt and duration. Fed states they have the authority and only need the Treasury to approve.
If what your saying is true then munis would have little risk. The yields on the Vang muni funds tell a much different story. Wide spreads between munis and treasuries. Even greater for munis because of fed tax free.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by ballons »

am wrote: Mon Apr 13, 2020 4:47 pm
If what your saying is true then munis would have little risk. The yields on the Vang muni funds tell a much different story. Wide spreads between munis and treasuries. Even greater for munis because of fed tax free.
Municipal Liquidity Facility
April 9, 2020

1. Friday was a holiday, so only 1 business day has passed.
2. MLF is not for all munis as I quoted.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by MikeG62 »

am wrote: Mon Apr 13, 2020 4:47 pm
ballons wrote: Mon Apr 13, 2020 4:06 pm
gmaynardkrebs wrote: Mon Apr 13, 2020 3:42 pm I don't believe the Fed has been given the authority to buy directly the bonds of most municipalities, or to purchase directly or indirectly below investment grade muni bonds. The purchases are also limited to shorter durations, and certain budget criteria. So in that sense QE, has limitations with regard to aiding states and municipalities.
https://www.barrons.com/articles/the-fe ... 1586524201

The Fed’s program, called the municipal liquidity facility, can directly buy up to $500 billion in municipal bonds from states, cities with more than one million people, and counties with more than two million people. That means the program isn’t open to most local governments as there are only 10 cities and 16 counties in the U.S. that meet the Fed’s criteria. Each muni-bond issuer must obtain Fed approval to use the facility, and states can ask the Fed to lift their borrowing caps on behalf of smaller municipalities and other entities that are ineligible.

State and local governments will be able to sell only bonds maturing in two years or less to the Fed. Each transaction’s pricing will depend on the credit rating of the state or municipal government at the time of the bonds’ purchase, according to the central bank’s term sheet.
New SPV does just that.
https://www.federalreserve.gov/newseven ... 00409a.htm

The Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

All of the facilities mentioned above are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
Fed saying more can be on the way if needed including expanding to all muni debt and duration. Fed states they have the authority and only need the Treasury to approve.
If what your saying is true then munis would have little risk. The yields on the Vang muni funds tell a much different story. Wide spreads between munis and treasuries. Even greater for munis because of fed tax free.
Muni’s do have little risk. The yield spread you reference likely has more to do with the insatiable demand among institutional investors for Treasuries than it does to muni risks and the fact that the credit markets may still not be trading normally.

Copied from a post I made in another thread this morning:

...Given the actions taken by the Fed and Treasury to stabilize the corporate credit markets, it seems almost a certainty that they will come up with some form of assistance for states and local municipalities that suffer severe financial difficulty resulting from Covid-19 (in fact, the most recent legislation passed by Congress includes some funds for the muni market (for short-term paper) - and it sounds like more may well be on the way). After all, if there is a wave of muni defaults across formerly highly rated (AAA/AA) muni bonds, one would have to wonder how these states and local municipalities will ever raise funds again in the credit markets. This is not like companies going out of business - these states and municipalities aren’t going away. And it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
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JackoC
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Re: Larry Swedroe: Munis Increasingly Risky

Post by JackoC »

ballons wrote: Mon Apr 13, 2020 7:08 pm
am wrote: Mon Apr 13, 2020 4:47 pm If what your saying is true then munis would have little risk. The yields on the Vang muni funds tell a much different story. Wide spreads between munis and treasuries. Even greater for munis because of fed tax free.
Municipal Liquidity Facility
April 9, 2020
1. Friday was a holiday, so only 1 business day has passed.
2. MLF is not for all munis as I quoted.
1. One day would be more than enough time for the market to react if that was really surprising news. But since it's been clear for awhile the Fed is in 'whatever it takes' mode, the new information content of that announcement was probably small. There's been a huge drop in muni yields going back some days before that announcement.*
2. But I agree this general move by the Fed is fairly important (even if generally expected for awhile, there would have to be legislation for the Fed to be able to directly buy longer muni's so that wasn't expected). Short term funding with direct Fed support can be used to redeem long term bonds as a stopgap. That should help lower longer term yields/muni spreads also, and the expectation of more direct Fed support for short term, has.

*See current muni benchmark yields here. SEC yields of muni funds are a highly unreliable measure in a fast moving market because of the 30 day averaging effect. Muni yields have dropped dramatically in the last week, though are still highly elevated v treasury yields by historical standards. High grade municipals long yielded ca. 70%'s of treasury yields. Now even with the huge bounce back in muni's it's ~200%, 10 yr AA muni v the 10 yr note. Some of that is, and a lot of previous ballooning of muni yields was, liquidity preference rather than just compensation for default risk. But municipal entities suffering an unprecedented nationwide deterioration in their finances, and which can't print their own money, even though 'everybody knows' they'll be supported by the Federal govt if push comes to shove...makes sense that would require a significantly higher credit premium over treasuries than it did. Muni optimists IMO might confuse two things, federal govt would never allow widespread collapse of state and local govt operations (I agree, at least within its power), v federal govt would never require muni bondholders to foot some of the bill via credit losses (much less certain). In the near term, no-strings-attached bailouts might be the rule. But after the immediate crisis passes, the solution to still severely damaged municipal finances might include credit losses to bondholders at a relatively much higher rate than historically, though not disastrously high necessarily.
https://www.fmsbonds.com/market-yields/
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Re: Larry Swedroe: Munis Increasingly Risky

Post by bck63 »

Rick Ferri wrote: Sun Apr 12, 2020 8:19 pm
bck63 wrote: Fri Apr 10, 2020 2:41 pm
am wrote: Fri Apr 10, 2020 1:34 pm
bck63 wrote: Fri Apr 10, 2020 1:31 pm
am wrote: Fri Apr 10, 2020 1:28 pm

Can someone who knows his email or contact info have him comment here about current views? I believe I’ve seen him comment recently on other issues. Thanks.
He is no longer contributing on Bogleheads, as I recall.
Last post was Jan 19, 2020.
Correct. Almost four months ago. And it was announced on here by (I believe) Rick Ferri that Mr. Swedroe would no longer be contributing on Bogleheads.
Nope. That's news to me.

Rick Ferri
My apologies for the error. I added an edit to my post.
Last edited by bck63 on Tue Apr 14, 2020 3:14 pm, edited 1 time in total.
afan
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Re: Larry Swedroe: Munis Increasingly Risky

Post by afan »

I am not the kind of boglehead who hangs on every word of anyone. I would note that Larry has announced his departure, come back, left again and repeated this cycle. Maybe this time it is forever. Maybe not.

In any case, he is still active and it is easy to find his comments. Just not here.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
am
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Re: Larry Swedroe: Munis Increasingly Risky

Post by am »

MikeG62 wrote: Tue Apr 14, 2020 9:20 am
am wrote: Mon Apr 13, 2020 4:47 pm
ballons wrote: Mon Apr 13, 2020 4:06 pm
gmaynardkrebs wrote: Mon Apr 13, 2020 3:42 pm I don't believe the Fed has been given the authority to buy directly the bonds of most municipalities, or to purchase directly or indirectly below investment grade muni bonds. The purchases are also limited to shorter durations, and certain budget criteria. So in that sense QE, has limitations with regard to aiding states and municipalities.
https://www.barrons.com/articles/the-fe ... 1586524201

The Fed’s program, called the municipal liquidity facility, can directly buy up to $500 billion in municipal bonds from states, cities with more than one million people, and counties with more than two million people. That means the program isn’t open to most local governments as there are only 10 cities and 16 counties in the U.S. that meet the Fed’s criteria. Each muni-bond issuer must obtain Fed approval to use the facility, and states can ask the Fed to lift their borrowing caps on behalf of smaller municipalities and other entities that are ineligible.

State and local governments will be able to sell only bonds maturing in two years or less to the Fed. Each transaction’s pricing will depend on the credit rating of the state or municipal government at the time of the bonds’ purchase, according to the central bank’s term sheet.
New SPV does just that.
https://www.federalreserve.gov/newseven ... 00409a.htm

The Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

All of the facilities mentioned above are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
Fed saying more can be on the way if needed including expanding to all muni debt and duration. Fed states they have the authority and only need the Treasury to approve.
If what your saying is true then munis would have little risk. The yields on the Vang muni funds tell a much different story. Wide spreads between munis and treasuries. Even greater for munis because of fed tax free.
Muni’s do have little risk. The yield spread you reference likely has more to do with the insatiable demand among institutional investors for Treasuries than it does to muni risks and the fact that the credit markets may still not be trading normally.

Copied from a post I made in another thread this morning:

...Given the actions taken by the Fed and Treasury to stabilize the corporate credit markets, it seems almost a certainty that they will come up with some form of assistance for states and local municipalities that suffer severe financial difficulty resulting from Covid-19 (in fact, the most recent legislation passed by Congress includes some funds for the muni market (for short-term paper) - and it sounds like more may well be on the way). After all, if there is a wave of muni defaults across formerly highly rated (AAA/AA) muni bonds, one would have to wonder how these states and local municipalities will ever raise funds again in the credit markets. This is not like companies going out of business - these states and municipalities aren’t going away. And it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That’s a very good point.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by typical.investor »

am wrote: Tue Apr 14, 2020 7:17 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 am After all, if there is a wave of muni defaults across formerly highly rated (AAA/AA) muni bonds, one would have to wonder how these states and local municipalities will ever raise funds again in the credit markets. This is not like companies going out of business - these states and municipalities aren’t going away. And it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That’s a very good point.
That is my thinking exactly.

75% (or two thirds depending on what you read) of the infrastructure in the US is financed by municipal bonds.

Schools, hospitals, highways, bridges, water, sewer, airports, ports ...

I guess I believe in the mechanism, a way for States and Municipalities to obtain funding.

I just don't see how America operates without those things.

I guess it's possible for munis to go out of existence completely in States that must default, but there would have to be a funding mechanism to replace it. I don't see a new mechanism coming into existence that is entirely free from liabilities of the old one.

I think this has been seen in Puerto Rico. It's a huge mess but proposals are being floated for repayment in cash and new bonds with recovery rates ranging from approximately 65% to 78%. Of course it's still very much a legal battle, and it's mostly hedge funds that will recover that as they dropped out of the index (Bloomberg Barclays High Yield Municipal Bond Index for example) and thus are no longer held by most funds.

I like CEFs for that reason (not having to shed holdings). And being able to buy them at steep discounts when volatility hits and investors flee. And having moderate leverage. Most have leverage in a mortgage, but I rent so don't.

One should never invest based on emotion but the truth is Munis just sing America to my heart in a way that equities with their revenue from and employment all over the world don't. And I will just take whatever my CEFs (in the S-Network Municipal Bond Closed-End Fund Index) return.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

MikeG62 wrote: Tue Apr 14, 2020 9:20 amAnd it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That doesn't mean they will have to bail out bondholders. Did they bailout out the GM Smartnotes bondholders when they bailed out GM? (No.). They can rescue the municipalities by direct grants, and screw the bondholders. That would actually put municipalities in a better position to borrow.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by am »

am wrote: Tue Apr 14, 2020 7:17 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 am
am wrote: Mon Apr 13, 2020 4:47 pm
ballons wrote: Mon Apr 13, 2020 4:06 pm
gmaynardkrebs wrote: Mon Apr 13, 2020 3:42 pm I don't believe the Fed has been given the authority to buy directly the bonds of most municipalities, or to purchase directly or indirectly below investment grade muni bonds. The purchases are also limited to shorter durations, and certain budget criteria. So in that sense QE, has limitations with regard to aiding states and municipalities.
https://www.barrons.com/articles/the-fe ... 1586524201

The Fed’s program, called the municipal liquidity facility, can directly buy up to $500 billion in municipal bonds from states, cities with more than one million people, and counties with more than two million people. That means the program isn’t open to most local governments as there are only 10 cities and 16 counties in the U.S. that meet the Fed’s criteria. Each muni-bond issuer must obtain Fed approval to use the facility, and states can ask the Fed to lift their borrowing caps on behalf of smaller municipalities and other entities that are ineligible.

State and local governments will be able to sell only bonds maturing in two years or less to the Fed. Each transaction’s pricing will depend on the credit rating of the state or municipal government at the time of the bonds’ purchase, according to the central bank’s term sheet.
New SPV does just that.
https://www.federalreserve.gov/newseven ... 00409a.htm

The Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities. The facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents. Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.

All of the facilities mentioned above are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
Fed saying more can be on the way if needed including expanding to all muni debt and duration. Fed states they have the authority and only need the Treasury to approve.
If what your saying is true then munis would have little risk. The yields on the Vang muni funds tell a much different story. Wide spreads between munis and treasuries. Even greater for munis because of fed tax free.
Muni’s do have little risk. The yield spread you reference likely has more to do with the insatiable demand among institutional investors for Treasuries than it does to muni risks and the fact that the credit markets may still not be trading normally.

Copied from a post I made in another thread this morning:

...Given the actions taken by the Fed and Treasury to stabilize the corporate credit markets, it seems almost a certainty that they will come up with some form of assistance for states and local municipalities that suffer severe financial difficulty resulting from Covid-19 (in fact, the most recent legislation passed by Congress includes some funds for the muni market (for short-term paper) - and it sounds like more may well be on the way). After all, if there is a wave of muni defaults across formerly highly rated (AAA/AA) muni bonds, one would have to wonder how these states and local municipalities will ever raise funds again in the credit markets. This is not like companies going out of business - these states and municipalities aren’t going away. And it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That’s a very good point.
Only thing I wonder is how can the gov, keep printing money, going further into debt without limits or apparent consequence?
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

am wrote: Tue Apr 14, 2020 10:23 pm
Only thing I wonder is how can the gov, keep printing money, going further into debt without limits or apparent consequence?
Google "modern monetary theory" aka MMT.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by typical.investor »

gmaynardkrebs wrote: Tue Apr 14, 2020 10:21 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 amAnd it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That doesn't mean they will have to bail out bondholders. Did they bailout out the GM Smartnotes bondholders when they bailed out GM? (No.). They can rescue the municipalities by direct grants, and screw the bondholders. That would actually put municipalities in a better position to borrow.
GM Smartnotes weren’t corporate bonds.

I don’t believe there was ever any expectation of being able to make a claim on assets in a bankruptcy. Anyway, their prospectus lists them as "unsecured and unsubordinated obligations". Are you suggesting that municipal debt is also "unsecured and unsubordinated obligations"? I doubt that is the case. Please cite references if you believe it is.

Here is the SEC link that shows they were sold as "unsecured and unsubordinated obligations". https://www.sec.gov/Archives/edgar/data ... e424b3.htm
Last edited by typical.investor on Tue Apr 14, 2020 11:04 pm, edited 1 time in total.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

typical.investor wrote: Tue Apr 14, 2020 10:43 pm
gmaynardkrebs wrote: Tue Apr 14, 2020 10:21 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 amAnd it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That doesn't mean they will have to bail out bondholders. Did they bailout out the GM Smartnotes bondholders when they bailed out GM? (No.). They can rescue the municipalities by direct grants, and screw the bondholders. That would actually put municipalities in a better position to borrow.
GM Smartnotes weren’t corporate bonds.

I don’t believe there was ever any expectation of being able to make a claim on assets in a bankruptcy.
Yeah, but the point is the same. I believe they were from the GMAC subsidiary, secured by car loans. Mostly Mom and Pop investors, who got totally screwed.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by typical.investor »

gmaynardkrebs wrote: Tue Apr 14, 2020 10:58 pm
typical.investor wrote: Tue Apr 14, 2020 10:43 pm
gmaynardkrebs wrote: Tue Apr 14, 2020 10:21 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 amAnd it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That doesn't mean they will have to bail out bondholders. Did they bailout out the GM Smartnotes bondholders when they bailed out GM? (No.). They can rescue the municipalities by direct grants, and screw the bondholders. That would actually put municipalities in a better position to borrow.
GM Smartnotes weren’t corporate bonds.

I don’t believe there was ever any expectation of being able to make a claim on assets in a bankruptcy.
Yeah, but the point is the same. I believe they were from the GMAC subsidiary, secured by car loans. Mostly Mom and Pop investors, who got totally screwed.
Revenue bonds are secured and GO bonds are backed by a pledge to pay from taxation. Sure there can be a haircut in either circumstance.

Anyway, treasury yields are low. Munis have more risk than they used to. So then alts got introduced as having higher returns but less risk. I don't see that they have turned out that way.

I hold CDs and LLTs as well, but I don't see a need to write off the muni market. I'd prefer them to reinsurance, peer-to-peer lending, alternative premium funds etc.

I'd increase holdings in CDs if I didn't think the risk of muni's was worth their yields. LLTs are great for rebalancing.

GM Smartbonds? Yeah mom and pop bought them thinking GM is a great name and the yield is fantastic. Only they weren't GM corporate bonds. Then GM cleverly sold of GMAC who was actually issuing the bonds to a hedgefund who twisted the screws to maximize their profits.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by MikeG62 »

gmaynardkrebs wrote: Tue Apr 14, 2020 10:21 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 amAnd it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That doesn't mean they will have to bail out bondholders. Did they bailout out the GM Smartnotes bondholders when they bailed out GM? (No.). They can rescue the municipalities by direct grants, and screw the bondholders. That would actually put municipalities in a better position to borrow.
First, you know you are comparing apples and pears.

Second, who is it exactly that would invest in municipalities after the prior bondholders (of formerly highly rated bonds) got "screwed" out of their principal? I've been a muni bond investor since the 1990's and I most certainly would not.
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Re: Larry Swedroe: Munis Increasingly Risky

Post by afan »

Not at all uncommon for entities to default on their bonds then return to the credit markets. Investors gamble on the value of the high promised interest payments vs the risk of another default before they collect enough money to make the investment pay off.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: Larry Swedroe: Munis Increasingly Risky

Post by gmaynardkrebs »

MikeG62 wrote: Wed Apr 15, 2020 6:39 am
gmaynardkrebs wrote: Tue Apr 14, 2020 10:21 pm
MikeG62 wrote: Tue Apr 14, 2020 9:20 amAnd it is clear the government is willing to go all-in to prevent a wave of bankruptcies across businesses. What chance is there they won’t do the same thing for struggling states and municipalities?
That doesn't mean they will have to bail out bondholders. Did they bailout out the GM Smartnotes bondholders when they bailed out GM? (No.). They can rescue the municipalities by direct grants, and screw the bondholders. That would actually put municipalities in a better position to borrow.
First, you know you are comparing apples and pears.

Second, who is it exactly that would invest in municipalities after the prior bondholders (of formerly highly rated bonds) got "screwed" out of their principal? I've been a muni bond investor since the 1990's and I most certainly would not.
So, you and others have persuaded me that Smartnotes comparison is not apt. :)
And for the record, I have kept all my munis and in fact added a little to my position in the intermediate fund.

But, the "who would invest" after default argument is not so cut and dried. Plenty of countries that have defaulted are able to go back to the debt markets after default, often at lower rates than before, because, having discharged via bankruptcy (or whatever) their previous debt, which was probably excessive, they are now in a strong position to service new issuance. I believe Argentina was back issuing debt at pretty low rates in a relatively short period, and more recently they were able to issue a 100 year bond at attractive rates. Second, there is the contagion effect: if things get so bad that lots of muni borrowers start to default en masse, others start to do so because they will no longer be singled out as bad actors. Warren Buffet cited the contagion effect when he decided not to enter the muni insurance business after the Ambac debacle in 2008. All I am saying is that "who would invest" argument is not as reassuring to me as it might be to others.

Again, I'm still a muni investor, and am likely to remain so for tax reasons. However, the spread in the TEY between munis and Treasuries is going to have to be considerably wider than it was 3 months ago for me to sustain my current allocation. Right now, the spread is wide enough, but only because because the T-bonds are paying nothing. That could change at some point.
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High Quality Munis are still good investments

Post by hudson »

gmaynardkrebs wrote: Wed Apr 15, 2020 8:30 am Again, I'm still a muni investor, and am likely to remain so for tax reasons. However, the spread in the TEY between munis and Treasuries is going to have to be considerably wider than it was 3 months ago for me to sustain my current allocation.
Me too. This has already been said....High quality muni funds sailed through the great depression. They only seem to have problems during equity panics...so far. Muni funds like VWIUX and BMBIX have solid holdings. High quality munis are ranked just behind treasuries for safety. The payouts can be very attractive for those in the 22% tax brackets and higher. Depending on your state and tax bracket, the after tax payout (actual dividends) on VWIUX crushes the payout on a 2% CD. (Break out your paper and pencil and check my math.)

Therefore, for many, high quality muni funds are good.

William Bernstein said this on April 4, 2020,
There's nothing wrong with having some municipals and corporates, but you can't count on them during periods when you're going to need capital the most. You always want to be sure there are plenty of T's and CDs in front of them.
viewtopic.php?p=5160087#p5160087
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Re: High Quality Munis are still good investments

Post by Blue456 »

hudson wrote: Wed Apr 15, 2020 9:17 am
gmaynardkrebs wrote: Wed Apr 15, 2020 8:30 am Again, I'm still a muni investor, and am likely to remain so for tax reasons. However, the spread in the TEY between munis and Treasuries is going to have to be considerably wider than it was 3 months ago for me to sustain my current allocation.
Me too. This has already been said....High quality muni funds sailed through the great depression. They only seem to have problems during equity panics...so far. Muni funds like VWIUX and BMBIX have solid holdings. High quality munis are ranked just behind treasuries for safety. The payouts can be very attractive for those in the 22% tax brackets and higher. Depending on your state and tax bracket, the after tax payout (actual dividends) on VWIUX crushes the payout on a 2% CD. (Break out your paper and pencil and check my math.)

Therefore, for many, high quality muni funds are good.

William Bernstein said this on April 4, 2020,
There's nothing wrong with having some municipals and corporates, but you can't count on them during periods when you're going to need capital the most. You always want to be sure there are plenty of T's and CDs in front of them.
viewtopic.php?p=5160087#p5160087
According to his book "The Only Guide to Winning Bond Strategy," Larry stills finds Munis safer than Corporate bonds in the AAA/AA rankings. If one feels truly uncomfortable with AAA/AA rated munis then TBM is completely out of the question.
If would be great to get Larry's input in here.
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Re: High Quality Munis are still good investments

Post by hudson »

Blue456 wrote: Wed Apr 15, 2020 10:22 am According to his book "The Only Guide to Winning Bond Strategy," Larry stills finds Munis safer than Corporate bonds in the AAA/AA rankings. If one feels truly uncomfortable with AAA/AA rated munis then TBM is completely out of the question.
If would be great to get Larry's input in here.
Larry's book was published long ago; I haven't seen anything in his recent writings that would change it.
I believe that it is commonly held that AAA/AA munis are much safer than corporate/investment grade bonds.

There are no munis in total bond funds.

I would rank bond safety....
Treasuries
Highly rated munis....AAA/AA
Total Bond
Investment grade/Corporate

Which is safer VWIUX...Vang. Intermed Muni or Vang. Total Bond? I'm not sure. One could argue either way. Both are Vanguard Risk Potential 2.
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grabiner
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Re: High Quality Munis are still good investments

Post by grabiner »

Blue456 wrote: Wed Apr 15, 2020 10:22 am There are no munis in total bond funds.

I would rank bond safety....
Treasuries
Highly rated munis....AAA/AA
Total Bond
Investment grade/Corporate

Which is safer VWIUX...Vang. Intermed Muni or Vang. Total Bond? I'm not sure. One could argue either way. Both are Vanguard Risk Potential 2.
Risk potential 2 covers a fairly wide range. Vanguard rates even Intermediate-Term Corporate Bond Index risk level 2; this fund has more than half its bonds rated BBB, and the market recognizes this risk with a 3.46% yield. Total Bond Market is significantly less risky because it holds Treasuries and GNMAs as well as the corporates. (GNMAs have a different type of risk.)

Normally, I would consider the intermediate-term muni fund and the total bond market fund comparable in risk; usually, the yield on the muni fund is about 75% of the yield on Total Bond Market. But these are not normal times; the market now gives the muni fund a higher yield (2.17% versus 1.82%). Effectively, the market is now saying that munis are as risky as corporate bonds; Intermediate-Term Corporate Bond ETF yields 3.46%, while Long-Term Tax-Exempt Admiral, which actually has a slightly shorter duration, yields 2.58%, which would be break-even at a 26% tax rate.
Last edited by grabiner on Wed Apr 15, 2020 11:53 am, edited 1 time in total.
Wiki David Grabiner
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