Muni bonds and a rate cut this week?

[Oilcans]

Any thoughts on how a rate cut may affect municipal bonds?

[ohai]

It depends on the guidance for the second rate cut and beyond.

[Ricchan]

I'd guess this rate cut is already factored into current muni bond yields, if it's anything like treasuries as shown in this post.

[grabiner]

The rates which the Fed tries to set are very-short-term rates. Long-term rates are set by bond traders based on their expectations of rates over the full term, and thus are not sensitive to short-term moves, even unexpected ones. A change in conditions over the next few months, such as the expected July rate cut being postponed to September, would do almost nothing to a 10-year bond.

[whodidntante]

It looks like MUB (a major muni ETF) has had capital appreciation ~4% YTD, so muni bond yields have already fallen quite a bit this year.

[JimmyJammy]

Most of my bonds in my taxable account are munis. Should I diversify into other types of bonds in my taxable account to reduce risk?

[grabiner]

Most of my bonds in my taxable account are munis. Should I diversify into other types of bonds in my taxable account to reduce risk?

Diversification won't do much relative to the subject of this thread; rising interest rates will cause all bonds to lose value.

If you hold munis, this is presumably because they offer significantly higher after-tax yields than other bonds of comparable risk. Therefore, if you want to diversify away from munis, you should do this by holding the non-muni bonds in your IRA, with a few exceptions. If you are in a moderate federal bracket but a high state tax bracket, you might use TIPS in your taxable account, as they are exempt from state tax. And you might also consider I-Bonds, which have lower yields than TIPS but are exempt from state tax and tax-deferred for federal tax.

[not4me]

Generally speaking, 3rd quarter is not a time when munis come to market & I've seen indications that is expected to be true this year. That is, 3rd quarter will likely see more "maturities" than initial issuance, meaning the supply will fall relative to demand. Demand for munis isn't always the same as for corporates, treasuries, etc.

All that to say, I wouldn't look for major, immediate changes. And while it won't be distinguishable -- what change does occur might occur with or without fed action.

[grabiner]

Generally speaking, 3rd quarter is not a time when munis come to market & I've seen indications that is expected to be true this year. That is, 3rd quarter will likely see more "maturities" than initial issuance, meaning the supply will fall relative to demand.

I wouldn't expect the supply to vary, since most bonds have terms an exact number of years. If fewer 10-year munis are issued in July than in June, then fewer 10-year munis were issued in July 2009 than in June 2009, so there will be fewer maturing munis as well as fewer newly-issued munis,

[not4me]

Generally speaking, 3rd quarter is not a time when munis come to market & I've seen indications that is expected to be true this year. That is, 3rd quarter will likely see more "maturities" than initial issuance, meaning the supply will fall relative to demand.

I wouldn't expect the supply to vary, since most bonds have terms an exact number of years. If fewer 10-year munis are issued in July than in June, then fewer 10-year munis were issued in July 2009 than in June 2009, so there will be fewer maturing munis as well as fewer newly-issued munis,

I follow your logic IF I make a couple of assumptions. If you aren't making these same assumptions, I'd like to understand better. 1st assumption is that every bond issues "lives" to maturity; that is every bond issued in July 2009, matures in 2019. 2nd, every year the same amount of bonds are issued.

And let me be clear, I'm not predicting anything. My main point was that in my opinion the fed action (or inaction) was just one of multiple factors affecting munis. If rates do change, it isn't always easy to explain how each of those contribute to the result. I'm not sure the net issuance in 3rd quarter will be considered large enough to move rates, but it contributes.

Perhaps of interest is a graph found here: https://www.sifma.org/resources/researc ... ome-chart/

As I read this graph, it is showing amounts outstanding. Last full year was 2018 & munis had ~$3675 Billion. Ten years before (using your 10 year example, although I'm not sure that is "standard"), in 2008 munis outstanding amounted to ~31451 Billion...almost a factor of 10. It is a commonly echoes line on the board though that assumes bond market over time stays roughly the same except for interest rate.

[firebirdparts]

As I read this graph, it is showing amounts outstanding. Last full year was 2018 & munis had ~$3675 Billion. Ten years before (using your 10 year example, although I'm not sure that is "standard"), in 2008 munis outstanding amounted to ~31451 Billion...almost a factor of 10. It is a commonly echoes line on the board though that assumes bond market over time stays roughly the same except for interest rate.

You did not read the chart correctly. In 2008 total debt of the whole stack was 31 trillion. The munis were about 4.

[not4me]

As I read this graph, it is showing amounts outstanding. Last full year was 2018 & munis had ~$3675 Billion. Ten years before (using your 10 year example, although I'm not sure that is "standard"), in 2008 munis outstanding amounted to ~31451 Billion...almost a factor of 10. It is a commonly echoes line on the board though that assumes bond market over time stays roughly the same except for interest rate.

You did not read the chart correctly. In 2008 total debt of the whole stack was 31 trillion. The munis were about 4.

Oops -- thanks for the correction & keeping me honest. Seems like I'll never learn not to rush. It didn't make sense, but that didn't slow me down as it should. Re-reading, it looks like it did fall, but from 4 to 3.7...less dramatic, but still illustrates what I was trying to say. All years aren't the same....

But thanks for keeping me honest & not misleading