How safe is the Vang CA interm muni fund VCADX?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
ilan1h
Posts: 766
Joined: Mon Oct 22, 2007 3:40 pm

How safe is the Vang CA interm muni fund VCADX?

Post by ilan1h » Tue May 19, 2020 11:26 pm

With California requesting a federal bailout, how safe are its municipal bonds? My understanding is that these bonds are dependent on taxes and revenues being raised by the various state businesses which have issued them. Is there any realistic scenario where VCADX could crater? As of now it's mostly untouched by the pandemic despite an initial rocky period.

retired@50
Posts: 2591
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: How safe is the Vang CA interm muni fund VCADX?

Post by retired@50 » Wed May 20, 2020 12:24 am

ilan1h wrote:
Tue May 19, 2020 11:26 pm
With California requesting a federal bailout, how safe are its municipal bonds?
This question is too broad to answer. Different bonds in the portfolio of VCADX have different risk factors, funding sources, etc.
My understanding is that these bonds are dependent on taxes and revenues being raised by the various state businesses which have issued them.
Businesses don't issue municipal bonds, municipalities do. Think things like school districts, water districts, cities, the state itself, etc. Businesses issue corporate bonds.
Is there any realistic scenario where VCADX could crater?
Sure. If state income and sales taxes decline sufficiently, if bridge tolls decline sufficiently, etc. The risk of municipal bonds is linked to the funding source for the interest payments. If the funding dries up, then interest payments could be delayed or skipped until something can be worked out. Perhaps by a bankruptcy judge. The state doesn't have to go bankrupt for some of the various municipal bonds to default, since many are issued by smaller entities.

EDIT: I suppose it also depends on what you mean by "crater"? The fund VCADX holds over 4,400 bonds. So, it would take a decent number of defaults by various municipalities to drive the price of the fund down very much. According to the Vanguard website, the fund has traded in the range of $9.88 to $12.42 per share since inception in 2001.

Regards,
This is one person's opinion. Nothing more.

Topic Author
ilan1h
Posts: 766
Joined: Mon Oct 22, 2007 3:40 pm

Re: How safe is the Vang CA interm muni fund VCADX?

Post by ilan1h » Wed May 20, 2020 1:10 pm

California is $50 billion in debt and will probably not receive help from the federal government. They have large pension obligations and no easy way to increase revenues. They are more locked down than other states which implies that the economy will be harder hit than states that are opening up. Taxes are already sky high so I don't see that as a way to raise revenues. They are forced to cut expenses at the worst possible time for them to do so. I know that in some states, such as Illinois, servicing bond dept is considered so important that funds are specifically earmarked out of the budget to do so. I'm not sure if California does the same. Furthermore, I understand that it would be extremely foolhardy for a state to risk future bond investments by defaulting on bonds. I remember many years ago when CA was only 12 billion in the hole there was a lot of hand wringing about possible muni defaults. Now the debt is 4 times as high! Very worried since almost all of my retirement funds are in munis.

gr7070
Posts: 1016
Joined: Fri Oct 28, 2011 10:39 am

Re: How safe is the Vang CA interm muni fund VCADX?

Post by gr7070 » Wed May 20, 2020 1:27 pm

ilan1h wrote:
Wed May 20, 2020 1:10 pm
Very worried since almost all of my retirement funds are in munis.
Time to diversify.

Unfortunate you hadn't come to Bogleheads sooner.

FWIW I doubt I'd be losing sleep over the fund, but I sure wouldn't have "almost all my funds" in it or any thing.

Topic Author
ilan1h
Posts: 766
Joined: Mon Oct 22, 2007 3:40 pm

Re: How safe is the Vang CA interm muni fund VCADX?

Post by ilan1h » Wed May 20, 2020 1:49 pm

gr7070 wrote:
Wed May 20, 2020 1:27 pm
ilan1h wrote:
Wed May 20, 2020 1:10 pm
Very worried since almost all of my retirement funds are in munis.
Time to diversify.

Unfortunate you hadn't come to Bogleheads sooner.

FWIW I doubt I'd be losing sleep over the fund, but I sure wouldn't have "almost all my funds" in it or any thing.
Actually, I've been at Bogleheads for over 15 years. Initially, my bond exposure also included the national muni interm fund as well as BND. I still have BND as an important component but over the years I substituted the CA interm muni for the national muni (for the small tax advantage). There was a lot of discussion in Bogleheads regarding foregoing the tax advantage of purchasing munis in your own state so as to diversify in the national fund. I think that the consensus was that the risk of default was so small that it was not worth doing so. So over the years I allocated new monies to the CA muni fund and not the national one. I am beginning to rethink that strategy.

muffins14
Posts: 194
Joined: Wed Oct 26, 2016 4:14 am

Re: How safe is the Vang CA interm muni fund VCADX?

Post by muffins14 » Thu May 21, 2020 9:07 am

California had a multi-billion budget surplus before COVID-19, so I personally would worry about default, assuming the economy picks back up.

However I typically follow having no more than 50% of my munis in my state of residence.

JamesJonesJrJr
Posts: 63
Joined: Sun Apr 19, 2020 3:00 pm

Re: How safe is the Vang CA interm muni fund VCADX?

Post by JamesJonesJrJr » Thu May 21, 2020 11:23 am

Local governments across America are struggling pretty bad right now and all but the biggest municipalities are having trouble getting emergency funding. Wouldn't even consider munis even if I was in the 40% tax bracket.

gr7070
Posts: 1016
Joined: Fri Oct 28, 2011 10:39 am

Re: How safe is the Vang CA interm muni fund VCADX?

Post by gr7070 » Thu May 21, 2020 6:04 pm

ilan1h wrote:
Wed May 20, 2020 1:49 pm
I still have BND as an important component
How important can it be if "almost all of my retirement funds are in munis"?
ilan1h wrote:
Wed May 20, 2020 1:49 pm
There was a lot of discussion in Bogleheads regarding foregoing the tax advantage of purchasing munis in your own state so as to diversify in the national fund. I think that the consensus was that the risk of default was so small that it was not worth doing so. So over the years I allocated new monies to the CA muni fund and not the national one.
I know there was plenty of discussion to diversify across all assets.

I can't fathom how munis have ever been considered so safe to use them solely over equities, total bond, treasurys, tips, etc.
ilan1h wrote:
Wed May 20, 2020 1:49 pm
I am beginning to rethink that strategy.
I'd be acting on it.

Having equities will even reduce your risk.

Gleevec
Posts: 334
Joined: Sun Mar 03, 2013 11:25 am

Re: How safe is the Vang CA interm muni fund VCADX?

Post by Gleevec » Thu May 21, 2020 6:30 pm

What would have to happen for France or another EU major power to default? Even worse would have to happen to California which has a bigger economy than France with way more growth companies that work in tech and biotech, two sectors that have been robust during COVID19. Neither country controls a printing press.

California and the EU will be fine, its just too bad muni bond yields are as bad as treasury bond yields, there is very little reward to investing in any bonds right now

am
Posts: 3387
Joined: Sun Sep 30, 2007 9:55 am

Re: How safe is the Vang CA interm muni fund VCADX?

Post by am » Thu May 21, 2020 9:11 pm

JamesJonesJrJr wrote:
Thu May 21, 2020 11:23 am
Local governments across America are struggling pretty bad right now and all but the biggest municipalities are having trouble getting emergency funding. Wouldn't even consider munis even if I was in the 40% tax bracket.
Except that the government is essentially backing the bonds and municipalities so they may be safer now post covid.

Post Reply