Trying to understand muni bond fund behavior

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Latestarter
Posts: 632
Joined: Thu Apr 26, 2007 8:27 am

Trying to understand muni bond fund behavior

Post by Latestarter »

Today taxable bond funds were generally up or flat (DODIX up .24, BND up .17, VBMFX unchgd.), while muni funds were down across the board - between .09 and .20. The latter was true for intermediate and LT, state funds and national, high-quality and low-. For example, VWITX (national intermed.) was down .15, VWAHX (national high-yield) was down .09, VMATX (Mass.) was down .20, VNYTX (NY) was down .18.

Can anyone help me to understand why all the munis would behave this way? And, incidentally, are there events (e.g., yields on Treasuries) that anticipate what's likely to happen to muni funds on a given day?
peter71
Posts: 3769
Joined: Tue Jul 24, 2007 8:28 pm

a wild guess

Post by peter71 »

hi latestarter,

i hope you get an educated reply here b/c i've always liked the idea of munis for social rather than economic reasons.

my own "wild guess" is that it might have something to do with the bridge collapse in minneapolis: i.e., the expectation may be that city, county and state govts. are going to have to urgently raise new funds to build infrastructure, and, in turn, those new bond issues are going to be more attractive than those currently available . . .

again, that's just a wild guess, however, and if others have real knowledge here it'd be greatly appreciated!

pete
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: a wild guess

Post by Valuethinker »

peter71 wrote:hi latestarter,

i hope you get an educated reply here b/c i've always liked the idea of munis for social rather than economic reasons.

my own "wild guess" is that it might have something to do with the bridge collapse in minneapolis: i.e., the expectation may be that city, county and state govts. are going to have to urgently raise new funds to build infrastructure, and, in turn, those new bond issues are going to be more attractive than those currently available . . .

again, that's just a wild guess, however, and if others have real knowledge here it'd be greatly appreciated!

pete
I don't know any muni bond traders, but that is a typical knee jerk market pattern for 1 day's trading.

The expectation is that municipalities are going to examine a lot of old bridges, and find that many of them will need reconstruction.

Another factor may be worries about the municipal bond insurance companies which have finally reached The Economist this past week, a sure sign that they are running loose in the market.
Topic Author
Latestarter
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Joined: Thu Apr 26, 2007 8:27 am

Re: a wild guess

Post by Latestarter »

So it's really as straighforward as that? An event in the news that's thought to have an impact specifically on municipal finances? It's not a predictable result of some economic development, the way the release of a lower unemployment number can trigger fears that the Fed won't cut and thereby bring down bonds in general?
Valuethinker
Posts: 41430
Joined: Fri May 11, 2007 11:07 am

Re: a wild guess

Post by Valuethinker »

Latestarter wrote:So it's really as straighforward as that? An event in the news that's thought to have an impact specifically on municipal finances? It's not a predictable result of some economic development, the way the release of a lower unemployment number can trigger fears that the Fed won't cut and thereby bring down bonds in general?
There are always endless explanations for anything in the financial world, all of which may be spurious (random walk).

But yes, traders trade on news. The first reaction to a municipal infrastructure disaster will be to pull down the offer prices on muni bonds. It will be kneejerk and almost instantaneous. Since most muni bonds are quite illiquid, the jumps will be large and discontinuous.

There is no such thing as predictability in bond markets.

This kind of knee jerk happens in foreign exchange markets (perhaps 1000 times bigger and more liquid) all the time.

The lesson for individual investors is don't panic, and stick to your asset allocation. It's very seldom that a piece of news is so important, that you need to do something.
Topic Author
Latestarter
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Joined: Thu Apr 26, 2007 8:27 am

Post by Latestarter »

Happened again today. Muni funds flat or down (when we really needed a boost to cushion large equity losses) even though taxable bonds were up sharply (AGG up .44%!).
PatrickS
Posts: 51
Joined: Sat Feb 24, 2007 6:38 pm
Location: San Diego

Post by PatrickS »

I hope Larry Swedroe can give us some insight into this... Bump
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