I am considering purchasing some muni bonds for my personal portfolio and I have some questions for anyone with experience doing this: If something is rated AA or AAA with insurance (and I am willing to assume the insurance providers will continue to exist) is there anything else I should really care about besides yields, call provisions, and maturity? I am using my ameritrade account and their screening tools but I am not really satisfied with the data available (e.g. can’t seem to find bond price history), anyone like another discount broker for bond info? Note - this is play money, so please no speeches about stocks vs. bonds or portfolio diversification.
I’ve been loading up on triple-tax-exempt New York municipal bond funds. Tax equivalent yields are ridicurous at these prices.
when you say ‘funds’ do you mean bond mutual funds? why not buy individual bonds and avoid the management fees?
That’s like saying you want small cap Asian equity exposure and trying to pick Asian small cap stocks yourself. Unless you’re a muni bond analyst or know a good one I wouldn’t even know where to begin trying to analyze individual bonds from XYZ municipality. It’s one thing if you don’t care about diversification but another thing to go into a large bond investment relatively blind, even if the risk is low.
that sort of gets me back to my original questions - if the bonds are insured and I am willing to assume the insurance provider won’t go bad, is there really anything I care about other than yield, call provisions, and maturity? your comparison to small cap asian equities isn’t really fair, there are a lot more variables to consider with the performance of equities. here, I just want to lock in my nice tax exempt yields, and either the bond performs and I get those yields, or it defaults and the insurance gives me back my principal…
look at the underlying ratings. muni insurance isn’t worth crap these days.
ljw2 I think you got the main points down. insurance/ratings, GO vs. Rev, call provisions…agree with farley on the yields being just beautiful right now
“muni insurance isn’t worth crap these days.” Please send it to me then…
There are some good muni tax exempt ETFs out there. I’ve seen a few that yield ~5.5%
“that sort of gets me back to my original questions - if the bonds are insured and I am willing to assume the insurance provider won’t go bad, is there really anything I care about other than yield, call provisions, and maturity?” Assuming the insurance provider won’t go bad has gotten a lot of people in trouble. Are you looking at fixed or variable? If variable you will also want to see if they are ARS or VRDB’s. If they are VRDB’s then you will want to see who the bank is that is providing the letter of credit or standby bond purchase agreement (SBPA) to make sure they don’t go bad too. You may also want to check the SBPA docs to see what kind of termination provisions exist surrounding an insurer downgrade. Many SBPA contracts include a provision where the bank can terminate the SBPA if the insurer is downgraded below a certain level. If the insurer was downgraded and the SBPA is terminated then liquidity for the bonds may dry up. If they are ARS then you will want to know the max rate that is in the remarketing agreement. This is the rate that you are paid if the auction fails. Some issues are based on a specific number such as 12 or 15% while others may be based on something like the SIFMA index. The auction rate market has shrunk considerably so I’m not sure how much is out there.
I think we’re all missing the point. Only a few municipalities will default in a given quarter century as most muni bonds are backed by the explicit taxing authority of the gov’t, and those that aren’t are usually backed by the implicit taxing authority of the municipality that fears losing its ability to raise debt. I’d take the highest yielding bond possible.
thanks all. etf’s are a good suggestion, I will look into that. I just hate the idea of paying a fund manager to pick the bonds with the highest yields.
kkent Wrote: ------------------------------------------------------- > I think we’re all missing the point. Only a few > municipalities will default in a given quarter > century as most muni bonds are backed by the > explicit taxing authority of the gov’t, and those > that aren’t are usually backed by the implicit > taxing authority of the municipality that fears > losing its ability to raise debt. I’d take the > highest yielding bond possible. There’s usually a reason it’s the highest yielding bond…
TMurf, that of course means the highest yielding bond after tax with state tax consideration, with tax law in regard to residency, etc.
I’ve been buying muni auction rate securities. They have a fixed principal, usually $25k. When I started earlier this year there were about 900 offered at fidelity. Now, there are only a few hundred. People laugh at me because I actually look at the underlying financials of the municipality. I completely ignore the insurer ratings (I am short the insurers and that has been a very nice trade). For a while, I was averaging above 10% tax free on munis. Now, I’m getting around 4% tax free. There’s a trick i figured out… Buy ones that are about to be called. For whatever stupid reason, the yields spike up for the weeks leading into the call. Since they’re being called you don’t have to worry about liquidity. My guess is that nobody bothers to buy a security that’s about to be called so the auctions seize and the rate goes higher into the maximum penalty rate. It’s as low risk a way to get excessive returns as I’ve ever seen. I dare someone find an easier way to make 6+% with this little risk. Unfortunately, as I mentioned, the jig is up. Slim pickens are all that’s left.