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letsgobobby
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Post by letsgobobby » Tue Mar 27, 2012 1:42 am

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FabLab
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Re: all about muni bonds

Post by FabLab » Tue Mar 27, 2012 2:33 am

letsgobobby wrote:I am thinking of making the jump into the muni market, mostly to move stocks out of taxable accounts in anticipation of 2013 tax law change. I would pay 36.8% taxes on dividends and would like to avoid that.

I read the Boglehead wiki on munis, but I have a few questions.

1. Munis are very illiquid, it seems, leading one in the direction of using a fund rather than individual securities. However, even Vanguard's intermediate muni bond fund holds about 50% less than AAA quality. Swedroe recommends only the highest quality, true AAA muni bonds. How do I resolve this dilemma? Is there a AAA only muni bond fund available?

2. As with other types of bonds, is staying on the short end of the yield curve (5-7 years or fewer) recommended?

3. I have read that some muni bonds are subject to AMT. How would I know if I have one of those bonds? Obviously I'd like to avoid that.
Questions:
1. If I have any concerns over VWIUX this is probably it.
2. That's where my comfort level lies.
3. Select the Portfolio & Management tab for the fund on VG's site (check out the box Fixed income characteristics; AMT = 0.0%).

Cheers
The fundamental things apply as time goes by -- Herman Hupfeld

Valuethinker
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Re: all about muni bonds

Post by Valuethinker » Tue Mar 27, 2012 3:25 am

FabLab wrote:
letsgobobby wrote:I am thinking of making the jump into the muni market, mostly to move stocks out of taxable accounts in anticipation of 2013 tax law change. I would pay 36.8% taxes on dividends and would like to avoid that.

I read the Boglehead wiki on munis, but I have a few questions.

1. Munis are very illiquid, it seems, leading one in the direction of using a fund rather than individual securities. However, even Vanguard's intermediate muni bond fund holds about 50% less than AAA quality. Swedroe recommends only the highest quality, true AAA muni bonds. How do I resolve this dilemma? Is there a AAA only muni bond fund available?
In a fund, your exposure to lower credit grade securities is of less importance. If you are directly holding bonds, it is more important. I think Swedroe is talking about the former.

IG munis have a far lower historic default rate than IG corporate bonds. As long as the fund is investment grade you should probably be alright, even in these times of unprecedented fiscal stress.
2. As with other types of bonds, is staying on the short end of the yield curve (5-7 years or fewer) recommended?
You get into arguments about whether 'this time it is different' and whether longer maturity is favoured by higher yield. I would say for most investors probably no ie intermediate term is best.

Cannot speak to AMT but it is *the* key issue, it seems for a lot of muni bond investors. Tread carefully.

phositadc
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Re: all about muni bonds

Post by phositadc » Tue Mar 27, 2012 7:46 am

Those of you who are interested in muni funds but concerned about the credit quality of VWIUX should check out Baird's Intermediate-Term Muni fund, BMBIX: http://www.rwbaird.com/bolimages/Media/ ... -sheet.pdf.

Short summary: 68% AAA, 95% AAA or AA, 59% pre-refunded (meaning, in this case, backed by US Treasuries, aka, credit quality is essentially the same as US treasuries), duration = 5 years, no AMT exposure.

SEC yield is lower than VWIUX, but if credit quality is your concern, BMBIX should lay those concerns to rest.

I've had 10% of my total assets in it for over a year (I think I learned of it from FredFlintstone on this board), and although sometimes I might wish I got that extra % of return that VWIUX provided, I always sleep easy at night knowing the credit quality is as high as you can get for a muni bond fund.

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Re: all about muni bonds

Post by larryswedroe » Tue Mar 27, 2012 7:56 am

let'sgohobby
Nowhere did I recommend ONLY AAA. Though I would have no problem with someone limiting themselves to that strata. I personally use AAA/AA and also avoid all bonds, regardless of rating from the sectors that have had historically relatively poor persistence of ratings, health care, multifamily, private activity bonds. And avoid bonds that have their ratings based on insurance (we always did that). Stick with essential services and GOs. Also try to minimize/avoid call risks, having at least 80% coverage.

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Re: all about muni bonds

Post by Grt2bOutdoors » Tue Mar 27, 2012 8:00 am

I started doing that as well and my timing as always was perfect to have unrealized capital losses of roughly 1% in the span of two weeks time in the Intermediate Muni Fund - having a diversified portfolio helps to diminish the pain.

The intermediate and short-term funds are AMT-free, that is a big sticking point for me, no need for any more preferential items.
As long as the funds avoid private activity bonds or bonds that carry an AMT-free disclaimer, I'm good with that.
I agree with Larry, GO's and essential services are the way to go - always the last to be cut and backed by the general taxing authority of the state, same can't be said for an airport landing strip that was built with muni bonds and backed by landing fees - if less traffic lands, guess what? less income to service the debt.

I'm 1/3 short, 2/3'rds intermediate right now - accomdative policy in effect until at least 2014 - I would think munis would track federal debt unless some entities like Stockton run into severe fiscal problems.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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FabLab
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Re: all about muni bonds

Post by FabLab » Tue Mar 27, 2012 8:41 am

Valuethinker wrote:
FabLab wrote:
letsgobobby wrote:I am thinking of making the jump into the muni market, mostly to move stocks out of taxable accounts in anticipation of 2013 tax law change. I would pay 36.8% taxes on dividends and would like to avoid that.

I read the Boglehead wiki on munis, but I have a few questions.

1. Munis are very illiquid, it seems, leading one in the direction of using a fund rather than individual securities. However, even Vanguard's intermediate muni bond fund holds about 50% less than AAA quality. Swedroe recommends only the highest quality, true AAA muni bonds. How do I resolve this dilemma? Is there a AAA only muni bond fund available?
In a fund, your exposure to lower credit grade securities is of less importance. If you are directly holding bonds, it is more important. I think Swedroe is talking about the former.

IG munis have a far lower historic default rate than IG corporate bonds. As long as the fund is investment grade you should probably be alright, even in these times of unprecedented fiscal stress.
2. As with other types of bonds, is staying on the short end of the yield curve (5-7 years or fewer) recommended?
You get into arguments about whether 'this time it is different' and whether longer maturity is favoured by higher yield. I would say for most investors probably no ie intermediate term is best.

Cannot speak to AMT but it is *the* key issue, it seems for a lot of muni bond investors. Tread carefully.
VT,
I just noticed you have me in quotes with nothing I actually said. I'm sure it was a mistype, so no problem :D


Cheers & have a good day
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Re: all about muni bonds

Post by dmcmahon » Tue Mar 27, 2012 8:57 am

larryswedroe wrote:I personally use AAA/AA and also avoid all bonds, regardless of rating from the sectors that have had historically relatively poor persistence of ratings, health care, multifamily, private activity bonds. And avoid bonds that have their ratings based on insurance (we always did that). Stick with essential services and GOs. Also try to minimize/avoid call risks, having at least 80% coverage.
This seems wise, but likely to require you to buy individual bonds. I'd add "avoid bonds that have AMT impact" to your list (which, if you're buying individual issues, you'll be able to see in the description of the bond). Question: what would you do if you lived in California (which has a high income tax that you'd also want to avoid)? I don't think state GOs have AA ratings anymore.

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Re: all about muni bonds

Post by larryswedroe » Tue Mar 27, 2012 9:15 am

dmcmahon
I agree on the AMT bond situation, at least for most investors.
And there are certainly AA rated municipal bond GOs of states, in fact the vast majority are AA, with few A, Cal and Illinois among then

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Re: all about muni bonds

Post by DaveS » Tue Mar 27, 2012 10:02 am

Since you also asked about the Alternative Minimum Tax (AMT), roughly the AMT defines "tax free" differently. When a state or municipality uses it's taxing power to pay bond holders the bond is AMT tax free and otherwise tax free. GO bonds are an example. When a revenue stream is used to pay bond holders such as tolls from a specific road, or things like revenue from a seaport, then the "revenue bond" is counted as taxable under the AMT but may be otherwise tax free. Last time I looked the Vanguard Intermediate Term Tax free fund did not have any AMT bonds. That is an excellent fund BTW. The Vanguard High Yield Muni fund is about 12% AMT bonds. Dave

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Re: all about muni bonds

Post by Userdc » Tue Mar 27, 2012 10:25 am

Question on muni funds in a rising rate environment: Let's say i put $100 in a muni fund. I earn $3 in dividends, but due to rising rates, the NAV drops, and I sell the bond a year later for $97.

Can I claim the $3 as a capital loss to offset regular income?

So in essence this investment would have a zero total ROI, but it would generate a tax credit worth $1?

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Re: all about muni bonds

Post by Wagnerjb » Tue Mar 27, 2012 12:22 pm

Userdc wrote:Question on muni funds in a rising rate environment: Let's say i put $100 in a muni fund. I earn $3 in dividends, but due to rising rates, the NAV drops, and I sell the bond a year later for $97.

Can I claim the $3 as a capital loss to offset regular income?

So in essence this investment would have a zero total ROI, but it would generate a tax credit worth $1?
Yes, your example is accurate. But be careful with holding periods. If you have held the fund for less than 6 months, any tax-exempt interest you received during the holding period will be deducted from your loss. Using the figures in your example, your $3 loss is decreased by the $3 in tax-free interest, resulting in no tax loss for the investor.

Best wishes.
Andy

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Re: all about muni bonds

Post by neurosphere » Tue Mar 27, 2012 1:22 pm

Wagnerjb wrote:
Userdc wrote:Question on muni funds in a rising rate environment: Let's say i put $100 in a muni fund. I earn $3 in dividends, but due to rising rates, the NAV drops, and I sell the bond a year later for $97.

Can I claim the $3 as a capital loss to offset regular income?

So in essence this investment would have a zero total ROI, but it would generate a tax credit worth $1?
Yes, your example is accurate. But be careful with holding periods. If you have held the fund for less than 6 months, any tax-exempt interest you received during the holding period will be deducted from your loss. Using the figures in your example, your $3 loss is decreased by the $3 in tax-free interest, resulting in no tax loss for the investor.

Best wishes.

I feel this information (deducting muni capital losses) is an important point to mention in all of the threads involving the "risks" of muni bond fund investing. One can assume that muni investors are in relatively high tax brackets. Also, that muni funds are held in taxable accounts. Thus, in a scenario of rapidly rising rates causing losses in bond funds, bond funds can be sold at a loss and a portion of the loss would be recouped via tax-loss harvesting, no? I have not seen (or perhaps I have failed to notice) this detail in the conversations on the risks of muni bond funds in this 'historically low' interest rate environment. I wonder if there is any analysis of the actual 'benefit' tax loss harvesting provides, depending on one's tax rate.

NS

(edited for clarity)
Last edited by neurosphere on Tue Mar 27, 2012 3:07 pm, edited 1 time in total.
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Re: all about muni bonds

Post by etarini » Tue Mar 27, 2012 2:54 pm

chrikenn wrote:Those of you who are interested in muni funds but concerned about the credit quality of VWIUX should check out Baird's Intermediate-Term Muni fund, BMBIX
I bought a lot of Vanguard Intermediate Term Municipal (VWITX/VWIUX) until I started having the same worry about rating quality, and since then I've been putting my new muni money into BMBIX, though I haven't reduced my VWIUX.

I, too, am grateful to FredFlintstone for the tip.

Eric

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Re: all about muni bonds

Post by Bongleur » Tue Mar 27, 2012 2:57 pm

In an environment where the price of Munis is dropping, what asset classes will be rising to get some profits to offset?
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Re: all about muni bonds

Post by GregLee » Tue Mar 27, 2012 4:09 pm

One reason for buying municipals in a bond fund is that, since the fund will hold bonds from diverse sources, thus lowering your risk, you can hold lower quality bonds and thus get better interest rates. A reason I have had for hesitating over buying individual bonds, is that I had to buy and sell to a broker, not being able to deal in blocks of 100 bonds, leaving me at the mercy of whatever commission the broker decides to charge for the transactions.
Greg, retired 8/10.

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Re: all about muni bonds

Post by rendiggy » Wed Mar 28, 2012 1:11 am

It should probably be pointed out that while corporate and muni bonds share the same rating system (aaa/a/bbb/cc/etc) they are graded differently.

For example, this table shows the default rate of muni vs corporate bonds at identical ratings. So to point #1 of the original posters, if your baseline expectation comes from the corporate bond world, then the rating distribution of a typical muni fund will seem higher risk until you adjust for the different grading systems.

Cumulative historic default rates (in percent)

Code: Select all

------------------------------------------------------------------------
                                        Moody's               S&P
        Rating categories        ---------------------------------------
                                    Muni      Corp      Muni      Corp
------------------------------------------------------------------------
Aaa/AAA.........................      0.00      0.52      0.00      0.60
Aa/AA...........................      0.06      0.52      0.00      1.50
A/A.............................      0.03      1.29      0.23      2.91
Baa/BBB.........................      0.13      4.64      0.32     10.29
Ba/BB...........................      2.65     19.12      1.74     29.93
B/B.............................     11.86     43.34      8.48     53.72
Caa-C/CCC-C.....................     16.58     69.18     44.81     69.19
Investment grade................      0.07      2.09      0.20      4.14
Non-invest grade................      4.29     31.37      7.37     42.35
All.............................      0.10      9.70      0.29     12.98
------------------------------------------------------------------------
Shamelessly quoted from http://en.wikipedia.org/wiki/Municipal_bonds

Originally from http://www.gpo.gov/fdsys/pkg/CRPT-110hr ... rpt835.htm

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Re: all about muni bonds

Post by Kevin M » Wed Mar 28, 2012 1:44 am

I own some of each of the Vanguard national muni bond funds, and both CA muni funds. Keep in mind that the long-term muni funds only have durations in the 6-7 year range, so are not really long term compared to the taxable bond funds, where durations are 12 years or more.

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Re: all about muni bonds

Post by dratkinson » Wed Mar 28, 2012 3:43 am

letsgobobby wrote:...
3. I have read that some muni bonds are subject to AMT. How would I know if I have one of those bonds? Obviously I'd like to avoid that.
The AMT exposure is listed for the fund under the "Portfolio & Management" tab on Vanguard's website. It's also in the statutory prospectus. Don't remember if it's in the abridged prospectus. Both can be downloaded from Vanguard's website (if your computer is new enough, my Win98SE isn't).
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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FabLab
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Re: all about muni bonds

Post by FabLab » Wed Mar 28, 2012 7:21 am

dratkinson wrote:
letsgobobby wrote:...
3. I have read that some muni bonds are subject to AMT. How would I know if I have one of those bonds? Obviously I'd like to avoid that.
The AMT exposure is listed for the fund under the "Portfolio & Management" tab on Vanguard's website.
This was answered more specifically in the first response to the OP.
dratkinson wrote:It's also in the statutory prospectus. Don't remember if it's in the abridged prospectus.
With respect to Vanguard Intermediate-Term Tax-Exempt Investor (VWITX) and Admiral (VWIUX) it appears that only the rather bland statement, "Dividend and capital gains distributions that you receive may also be subject to state and local income taxes and the federal alternative minimum tax," occurs in either the Summary or Statutory Prospectus. But, as mentioned, the AMT exposure of 0.0% can be determined for the fund from the Fixed income characteristics box noted earlier.

Cheers
The fundamental things apply as time goes by -- Herman Hupfeld

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Re: all about muni bonds

Post by Valuethinker » Wed Mar 28, 2012 8:05 am

FabLab wrote:
Valuethinker wrote:
FabLab wrote:
letsgobobby wrote:I am thinking of making the jump into the muni market, mostly to move stocks out of taxable accounts in anticipation of 2013 tax law change. I would pay 36.8% taxes on dividends and would like to avoid that.

I read the Boglehead wiki on munis, but I have a few questions.

1. Munis are very illiquid, it seems, leading one in the direction of using a fund rather than individual securities. However, even Vanguard's intermediate muni bond fund holds about 50% less than AAA quality. Swedroe recommends only the highest quality, true AAA muni bonds. How do I resolve this dilemma? Is there a AAA only muni bond fund available?
In a fund, your exposure to lower credit grade securities is of less importance. If you are directly holding bonds, it is more important. I think Swedroe is talking about the former.

IG munis have a far lower historic default rate than IG corporate bonds. As long as the fund is investment grade you should probably be alright, even in these times of unprecedented fiscal stress.
2. As with other types of bonds, is staying on the short end of the yield curve (5-7 years or fewer) recommended?
You get into arguments about whether 'this time it is different' and whether longer maturity is favoured by higher yield. I would say for most investors probably no ie intermediate term is best.

Cannot speak to AMT but it is *the* key issue, it seems for a lot of muni bond investors. Tread carefully.
VT,
I just noticed you have me in quotes with nothing I actually said. I'm sure it was a mistype, so no problem :D


Cheers & have a good day
Apologies for that, hopefully what actually happened is clear, as the software does not appear to allow me to edit a post that has been quoted?

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Re: all about muni bonds

Post by fredflinstone » Wed Mar 28, 2012 8:18 am

letsgobobby, take a look at the Baird Intermediate Municipal Bond Fund (BMBIX).

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Hat
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Re: all about muni bonds

Post by Hat » Thu Mar 29, 2012 2:52 pm

After studying the price and distribution history of muni bond fund VMLUX, it appears that the fund's NAV does not decrease after a distribution as do stock mutual funds. Is this the case? If so, it would appear that there is no advantage in taxable to buying at any one particular time over another.

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Re: all about muni bonds

Post by Kevin M » Fri Mar 30, 2012 3:45 pm

Hat wrote:After studying the price and distribution history of muni bond fund VMLUX, it appears that the fund's NAV does not decrease after a distribution as do stock mutual funds. Is this the case? If so, it would appear that there is no advantage in taxable to buying at any one particular time over another.
Correct. Someone else can chime in with more technical accuracy, but my understanding is that you accrue dividends with the vanguard bond funds, so there is no impact on price upon dividend distributions. For example, if you sell shares of a VG bond fund mid-month, you will get a distribution of dividends accrued to the date of sale.

However, for cap gain distributions, you will see an impact on price as with a stock fund.

Kevin
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stratton
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Re: all about muni bonds

Post by stratton » Sun Apr 01, 2012 1:45 am

GregLee wrote:One reason for buying municipals in a bond fund is that, since the fund will hold bonds from diverse sources, thus lowering your risk, you can hold lower quality bonds and thus get better interest rates. A reason I have had for hesitating over buying individual bonds, is that I had to buy and sell to a broker, not being able to deal in blocks of 100 bonds, leaving me at the mercy of whatever commission the broker decides to charge for the transactions.
I'd suggest having 25% or 30% still in a bond fund for liquidity even if someone buys individual muni bonds. Having to take 3% or 4% bath because someone has to sell in a hurry just adds insult to injury. Considering Vanguard Admiral tax-exempt fund shares have a ~12 basis point cost this isn't too much fee drag. Heck, BMBIX is only 0.3% ER overhead for pretty high quality.

Paul
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Dr. Gaius Baltar
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Re: all about muni bonds

Post by Dr. Gaius Baltar » Sun Apr 01, 2012 9:58 am

VWITX has a 1.93% SEC Yield, yet it just issued a dividend with an annualized rate of 3.25%. How can a bond fund issue dividends which are so much higher than their SEC Yield?

Vanguard VWITX Distributions Page

$0.0382 monthly dividend, $14.09 Reinvest Price

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Kevin M
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Re: all about muni bonds

Post by Kevin M » Mon Apr 02, 2012 3:15 am

Dr. Gaius Baltar wrote:VWITX has a 1.93% SEC Yield, yet it just issued a dividend with an annualized rate of 3.25%. How can a bond fund issue dividends which are so much higher than their SEC Yield?

Vanguard VWITX Distributions Page

$0.0382 monthly dividend, $14.09 Reinvest Price
This is typical of bond funds now and has been for some time. They hold premium bonds that are trading above par (face) value, which have higher current yields to compensate for the decline in value as they approach maturity. If rates were to remain flat, the NAV of the fund and the distribution yields would gradually decline, such that at the end of the time period equal to the duration of the bond fund (about 5 years for this fund), you would end up having received an annualized total return about equal to the current SEC yield.

Kevin
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Re: all about muni bonds

Post by abuss368 » Mon Apr 02, 2012 8:44 pm

Vanguard Intermediate Term Tax Exempt Bond Fund.

No AMT concerns.
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stratton
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Re: all about muni bonds

Post by stratton » Tue Apr 03, 2012 1:23 am

This is what happens with bond etfs when their contents are illiquid at times.

http://www.bogleheads.org/forum/viewtop ... st=1353816

Paul
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