Muni bonds have done well even pre-tax

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Beliavsky
Posts: 927
Joined: Sun Jun 29, 2014 10:21 am

Muni bonds have done well even pre-tax

Post by Beliavsky » Thu Feb 21, 2019 9:48 pm

According to Portfolio Visualizer, over the period Jan 1987 - Jan 2019 (longest available for funds selected), the Maximum Sharpe Ratio portfolio of
VFINX, VWLTX, and VUSTX has been

Ticker Name Allocation
VFINX Vanguard 500 Index Investor 35.98%
VWLTX Vanguard Long-Term Tax-Exempt 18.81%
VUSTX Vanguard Long-Term Treasury Inv 45.21%

This occurs, even though VWLTX had the lowest CAGR of 5.58%, because VWLTX has had the lowest volatility, 5.33%. Results are here.

People in high tax brackets who have most of their savings in tax-deferred accounts should consider having much of their taxable savings in a fund such as VWLTX. Personally I use FTABX.

If VWAHX is added to the mix, it gets even more weight, pushing out VWLTX:

Maximum Sharpe Ratio
Ticker Name Allocation
VFINX Vanguard 500 Index Investor 28.71%
VUSTX Vanguard Long-Term Treasury Inv 32.84%
VWAHX Vanguard High-Yield Tax-Exempt 38.45%

Results are here.

Build America Bonds are taxable municipal bonds that have higher yields than tax-exempt municipal bonds. When the BAB ETF is included in the mix, the time period shortens to Jan 2010 - Jan 2019, and BAB gets a lot of weight in the Maximum Sharpe Ratio portfolio, driving out VUSTX:

Ticker Name Allocation
VFINX Vanguard 500 Index Investor 32.50%
VWLTX Vanguard Long-Term Tax-Exempt 0.87%
BAB Invesco Taxable Municipal Bond ETF 66.63%

Results are here.

User avatar
House Blend
Posts: 4569
Joined: Fri May 04, 2007 1:02 pm

Re: Muni bonds have done well even pre-tax

Post by House Blend » Fri Feb 22, 2019 2:16 pm

While on the topic of predicting the past, let me point out that VWITX (Intermediate Tax Exempt) has done well compared to VBMFX (Total Bond) even before discounting VBMFX for tax.

For the 30 years from 1/1989 to 1/2019, portfolio visualizer reports 5.26%/yr for VWITX and 5.89% for VBMFX.

That makes the break-even tax rate ~11%.

(To be fair, small amounts of that return may be net capital gains, which matters in taxable for both. One can hypothesize that the two funds had similar price fluctuations, so a similar range of prices for dividend reinvestment. In any case, for time intervals of this length, most of the shares resulting from a single lump investment are reinvested dividends.)

Broken into 5 year, January to January chunks (roughly duration-sized):

Code: Select all

           VWITX  VBMFX
2014-2019  3.28%  2.52%
2009-2014  5.48%  4.52%
2004-2009  3.85%  4.79%
1999-2004  4.85%  5.85%
1994-1999  4.55%  5.84%
1989-1994  7.83%  8.46%
So it is roughly the last 10 years where taxable bonds have really suffered relative to munis. Even so, the highest break-even tax rate among these 5 year periods was 22%.

<Insert disclaimer here about VWITX being riskier than VBMFX.>

RNJ
Posts: 810
Joined: Mon Apr 08, 2013 9:06 am

Re: Muni bonds have done well even pre-tax

Post by RNJ » Fri Feb 22, 2019 2:49 pm

In 1989 the Fed funds rate peaked just below 10%. What is the rate now?

Topic Author
Beliavsky
Posts: 927
Joined: Sun Jun 29, 2014 10:21 am

Re: Muni bonds have done well even pre-tax

Post by Beliavsky » Fri Feb 22, 2019 9:02 pm

RNJ wrote:
Fri Feb 22, 2019 2:49 pm
In 1989 the Fed funds rate peaked just below 10%. What is the rate now?
My post was about the relative performance of muni bonds and Treasury bonds, and falling Fed funds has helped both asset classes.

User avatar
Carlos Danger
Posts: 83
Joined: Fri Mar 16, 2018 6:32 pm

Re: Muni bonds have done well even pre-tax

Post by Carlos Danger » Fri Feb 22, 2019 9:35 pm

RNJ wrote:
Fri Feb 22, 2019 2:49 pm
What is the rate now?
Higher than what it will be for most of the next decade AT LEAST imho.

We're not likely getting back to "normal" anytime soon, and I believe it won't be long before the Fed is cutting again.

We refused to endure the pain we were due post-crash, we recklessly engaged in QE and years of a fed funds rate ~0, and now we've "built" an economy on those foundations.

The federal funds rate is at a LOFTY 2.5% and already we've had to panic and pause. And for good reason - the economy could NOT handle a continuation of the hikes. Powell and co. didn't pause because Jim Cramer demanded it before hitting some big red buttons or because the S&P 500 looked shaky. They paused because they and their army of PhD economists, mathmetcians, statisticians, etc. can manage to see beyond the tips of their noses.

We can't discuss politics here, so I'll just say that I would LOVE to believe that this is the "greatest economy ever" for purposes of 2020.

It's not. And I leave my feelings at the door when it comes to being an investor. Corporate debt is a disaster, federal debt is a disaster, the supposedly strong U.S. consumer is delinquent on his/her auto loan, laden with sudent loan debt, and saddled with a mortgage that CANNOT be re-financed to a lower rate since he/she already did that a few years ago while the federal funds rate was held at zero. Japan, Europe, and China are rolling over and we're still in a "global economy." The data here already doesn't look good. Horrific Q4 retail sales, plummeting Q4 GDP forecasts (looks like at the last hour we're going to be denied finally getting that +3% GDP year we've all been waiting for).

The only difference between today and the dog days of December including the Christmas Eve massacre is that we now know things are a HELL of a lot worse than we thought back then.

Bring on the treasuries. I'll take all I can get my hands on. Jack Bogle said that he might go from 60-40 equities/bonds to 50-50 if the seas looked stormy. I wasn't 60-40 but I'm heading that way because the horizon looks pitch-black to me, no matter how badly I might want it to be sunny.

DB2
Posts: 337
Joined: Thu Jan 17, 2019 10:07 pm

Re: Muni bonds have done well even pre-tax

Post by DB2 » Sat Feb 23, 2019 12:18 pm

Carlos Danger wrote:
Fri Feb 22, 2019 9:35 pm
RNJ wrote:
Fri Feb 22, 2019 2:49 pm
What is the rate now?
Higher than what it will be for most of the next decade AT LEAST imho.

We're not likely getting back to "normal" anytime soon, and I believe it won't be long before the Fed is cutting again.

We refused to endure the pain we were due post-crash, we recklessly engaged in QE and years of a fed funds rate ~0, and now we've "built" an economy on those foundations.

The federal funds rate is at a LOFTY 2.5% and already we've had to panic and pause. And for good reason - the economy could NOT handle a continuation of the hikes. Powell and co. didn't pause because Jim Cramer demanded it before hitting some big red buttons or because the S&P 500 looked shaky. They paused because they and their army of PhD economists, mathmetcians, statisticians, etc. can manage to see beyond the tips of their noses.

We can't discuss politics here, so I'll just say that I would LOVE to believe that this is the "greatest economy ever" for purposes of 2020.

It's not. And I leave my feelings at the door when it comes to being an investor. Corporate debt is a disaster, federal debt is a disaster, the supposedly strong U.S. consumer is delinquent on his/her auto loan, laden with sudent loan debt, and saddled with a mortgage that CANNOT be re-financed to a lower rate since he/she already did that a few years ago while the federal funds rate was held at zero. Japan, Europe, and China are rolling over and we're still in a "global economy." The data here already doesn't look good. Horrific Q4 retail sales, plummeting Q4 GDP forecasts (looks like at the last hour we're going to be denied finally getting that +3% GDP year we've all been waiting for).

The only difference between today and the dog days of December including the Christmas Eve massacre is that we now know things are a HELL of a lot worse than we thought back then.

Bring on the treasuries. I'll take all I can get my hands on. Jack Bogle said that he might go from 60-40 equities/bonds to 50-50 if the seas looked stormy. I wasn't 60-40 but I'm heading that way because the horizon looks pitch-black to me, no matter how badly I might want it to be sunny.
Agreed, it's going to get ugly.

yogesh
Posts: 321
Joined: Thu Oct 11, 2012 6:20 pm

Re: Muni bonds have done well even pre-tax

Post by yogesh » Sat Feb 23, 2019 2:04 pm

How is this comparable given OP has three ports with differing stock/bond allocations? 36/64, 29/71, 33/66
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040

Post Reply