I am considering this for personal investing, due to the tax exemptions. Does anyone have experience with this, and what have you learned so far about this sort of investment? Thanks.
What would you like to know? They’re exempt from federal taxes and can be at the state level too but it depends. You’re in California right? Just buy a CA muni bond fund…one that also avoids AMT. Then you’ll be free and clear.
That’s the easiest way to do it from taxation point of view. If you’re buying individual issues you’ll have to pick your own CA muni bonds, which is much more difficult than it seems.
Yes, after my recent tax bill i ran out and bought NYC muni which are AMT, NY State, City, and Federal exempt. Unfortunately, they’ve been getting crushed during this big run. I don’t think it’s a credit issue as Whitney forcasts (or used to forcast) i think it’s just a fear of rising rates and unfortunately these suckers tend to have long maturities.
It’s definetly going to be your cheapest/easilest way to get exposure and institutional trade sizes/execution. You may want to buy a National bond fund and pay the state taxes for the diversification, depends on how you feel about CA.
The bigger question is probably how much term risk you’re willing to take. You’ll prolly want to use Vanguard or iShares as your fund family- they tend to be the cheapest and trade at the lowest spreads.
MMD is a HY nat’l CEF if that helps you out.
Planning on buying individual bonds and holding to maturity or investing a fund? If a fund then principal loss can be real and permanent, especially a high risk with yields where they are now. Meredith Whitney was wrong in the timing, but that does not mean that munis are comletely secure, especially if/when the issue of underfunded pensions comes to a head.
I mean, most are using 7.5-8% return assumptions which is crazy with treasuries at 2%. Additionally, they’ve been using “pension bonds” to borrow against the assets of the pension and reinvest into bonds and equities, basically the same thing as using margin. If we get a big correction in equities or a few percentage point increase in interest rates then then it will be clear how underfunded pensions really are. At that point munis are going to sell off dramatically.
The combination of the current high valuations and the various public sector risks on the horizon make munis unattractive in my view.
Since I sense you are young, for tax shelters I think MLPs are a superior alternative due to the secular shale tailwind. I think they are debating MLP taxation exemptions in Congress soon (although they will never remove the exemption) so the sell off when that hits the news could be a good buying opportunity.
Don’t go passive in the fixed income space, especially in liquidity constrained spaces like munis (even more so for state specific) or HY. The tracking error is off the charts (compared to their passive equity relatives) and active management has continually and consistently been proven to add value.
Go passive for large growth, not for municipals.
Thanks for the feedback. This helps refine my list of criteria.
My taxes for 2012 are unfortunately high… turns out I owe a not-insignificant sum in additional taxes (low 5 figure sum). Some of this was due to dividend taxes.
Don’t hold them in tax free accounts if you have taxable accounts as well. There’s nothing intrinsically wrong with that, except that you are consuming limited capital in a tax-free account that should be applied to taxable investments, so they can benefit from the tax-free account status. The muni is already tax-free, so keep those investments in a normal taxable account.
Munis are likely to do well in the short run, because tax rates are going up (making the tax shield more valuable) and it looks like the housing market has finally found a floor and is rising steadily, so municipal income is likely to increase. However, interest rate rises may have dramatic effects on housing prices, plus the normal interest rate effects on fixed income, so it’s not quite as guaranteed as it may sound at first.
That’s completely false. If you’re holding period is similar to the bond fund’s duration you’re not going to lose money. I’d guarantee you, but you know…
The most famous case of muni bond fund investors getting screwed is what happened in the Oppenheimer Rochester fund - ORNAX. Investors lost nearly 50% in 2008 but if you held on to it (which many did not) you’d be back in the black (5 year number making 3.06% ann). Not awesome, but you’re not going to lose money in a muni bond fund if you’re holding period is longer than three years. Maybe four if we have another financial crises.
Conversely, if you buy individual issues, particularly in CA where they have a tendency to default, then you’re principal lose is real and permanent.
Edit: Also, in a rising rate environment being in a bond fund is beneficial (assuming you have to be in fixed income to begin with). A fund is constantly buying new bonds as they get cash in-flows and as they sell issues nearing maturity that f-up their duration. This is a good thing - as rates rise a bond fund will be buying newer issues at those higher rates. If you buy an individual issue at 2.5% today and rates go up to 3.5% a year from now you take a hit and miss out on the opportunity to participate on the higher yielding newer issues.
I dabbled in closed end muni etf’s back in 2011 when Meredith Whitney convinced everyone that half the states in the US were going to default. Bear in mind I have no background here and don’t do much fixed income analysis, but my major factors for choosing names were based on a widening of discount to NAV (compared to 3-yr, 1-yr and recent discounts); only buying names where distributions were 100% income and not ROC; and a very low level estimate of what the discount should be within a particular region for comparison. This doesn’t really apply to this environment as much, but I would do my best to understand the interest rate exposure you’re taking on b/c like others have said, that loss of principal can wipe out any tax advantage you might get.
I am happy to admit that Meredith Whitney’s predictions were wrong, but I confess I am surprised that more cities did not default in the 2010-2011 period.
I actually am too. My play was more on the the CEF structure than muni-specific. Those arbitragers get flooded and their books get flipped. Makes for an opportunity to buy way cheaper than should be possible.
Maybe I’m confused. If rates blow out and you hold a basket of bonds to maturity then you will get the principal back, provided they do not default. If you buy a fund then they strike an NAV daily and need to trade in and out of issues to meet investments and redemptions. I get what you’re saying with regard to duration…yep, I was confused. Haven’t done much with fixed investing since the CFA.
At least we can agree that anything is a better investment than worthless gold.
I guess you’re better off in a bond fund than individual bonds in a rising rate environment, but it’s still not the best place to be. Is there any floating rate munis?
I havent came across FR munis
If i remember correctly, munis (esp the ones trading at a discount) do well in a rising rate environment due to advanced refunding.
Buy premium bonds. It’ll hedge your interest rate risk some.
You are thinking about falling rates (discount bonds outperform par and premium) and the increased payments results from refinancing.
Dude, you guys are tards if you think that being in bond funds makes a difference vs indv bonds when rates rise. The bonds fall in price just like the NAV of the funds. The real difference is funds tend to target constant maturity/duration while the indv bonds eventually mature. It really only makes much of a difference if you’re pre-funding a liability. For most people constant maurity is fine.
If you’re a bank and you don’t mark your bonds to market and amoritze their market values, then yeah, they’re different… but for the most part you guys are just using mental accounting and disregarding market value.
+1 on whoever said higher coupons have less downside due to convexity, but everything is trading above par right now, so it’ll come naturally in any bond fund.
Yeah, no wonder you gf is a manipulative witch. You’re a douche.