Are Munis “safe enough” as a core fixed income holding?

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BogleBuddy12
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Are Munis “safe enough” as a core fixed income holding?

Post by BogleBuddy12 »

This question is regarding using something like VWITX (Vanguard Intermediate-Term Tax-Exempt Fund) as the main fund in one’s portfolio.

I understand treasuries, TIPS, I-Bonds, etc, are all going to be considered safer options to invest in.

But for someone in a high tax bracket, are munis “safe enough” to use as the core fixed income holding in one’s portfolio? Or should one consider pairing with Total Bond Market?

Thanks!
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anon_investor
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by anon_investor »

BogleBuddy12 wrote: Tue Nov 30, 2021 11:09 pm This question is regarding using something like VWITX (Vanguard Intermediate-Term Tax-Exempt Fund) as the main fund in one’s portfolio.

I understand treasuries, TIPS, I-Bonds, etc, are all going to be considered safer options to invest in.

But for someone in a high tax bracket, are munis “safe enough” to use as the core fixed income holding in one’s portfolio? Or should one consider pairing with Total Bond Market?

Thanks!
No tax advantaged space to hold bonds?
GP813
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by GP813 »

Some reading you might find interesting.

US municipal bond defaults and recoveries, 1970-2019
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patrick013
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by patrick013 »

GP813 wrote: Wed Dec 01, 2021 1:57 am Some reading you might find interesting.

US municipal bond defaults and recoveries, 1970-2019
Good charts showing AAA are still avoiding defaults.
age in bonds, buy-and-hold, 10 year business cycle
UpperNwGuy
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by UpperNwGuy »

Yes, I think they are safe. I used to hold a lot of them. I no longer hold them because I'm now in the 24% tax bracket. It I were in a higher bracket I would hold them.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by exodusNH »

BogleBuddy12 wrote: Tue Nov 30, 2021 11:09 pm This question is regarding using something like VWITX (Vanguard Intermediate-Term Tax-Exempt Fund) as the main fund in one’s portfolio.

I understand treasuries, TIPS, I-Bonds, etc, are all going to be considered safer options to invest in.

But for someone in a high tax bracket, are munis “safe enough” to use as the core fixed income holding in one’s portfolio? Or should one consider pairing with Total Bond Market?

Thanks!
They're probably safe enough, but whether they make sense depends on your tax bracket.

Since they're nearly always callable, their duration in rising interest rates increases (as they're not being called) and shortens when they decline (because they're being called and reissued at lower rates.) So, they're behavior can be a little weird.

They (apparently) aren't as liquid. If you intend to rebalance during bad times vs keeping them for capital preservation, you might not do as well as you would with a total bond fund.
prioritarian
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by prioritarian »

I use munis as an emergency fund/cash-like fund in taxable but they do little to diversify my primary equity positions so they are less "safe" than long treasuries, according to my opinion.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by carolinaman »

I think the higher rated munis are safe enough but it depends upon your tax bracket as to whether they are a good FI investment. I would avoid lower rated munis.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by privateID »

For my MIL, we are working toward her taxable bonds being all in munis (about 1.1M) and in her IRA all in TIPS (about 350K). She is in the 32% tax bracket. Have used Vanguard limited-Term Tax-Exempt Fund and Vanguard Intermediate-Term Tax-Exempt Fund. I hope they are safe.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by etfan »

I wonder about the risk rating of a well-diversified munis fund.

I believe the federal government would never allow large scale bankruptcies to happen without stepping in, and a few bankruptcies are not going to wipe out one's whole investment so as a whole they should recover in time.

Doesn't that make them almost as secure as federal government bonds?
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Rick Ferri »

The Vanguard Vanguard Intermediate-Term Tax-Exempt Fund holds 13,338 individual bonds from all 50 states. Investors do not need to worry about the safety of their principal.

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Re: Are Munis “safe enough” as a core fixed income holding?

Post by SquawkIdent »

Rick Ferri wrote: Wed Dec 01, 2021 10:01 am The Vanguard Vanguard Intermediate-Term Tax-Exempt Fund holds 13,338 individual bonds from all 50 states. Investors do not need to worry about the safety of their principal.

Rick Ferri
Rick,

What are your feelings about Vanguard individual state muni bond funds?

Thank you.
JackoC
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by JackoC »

etfan wrote: Wed Dec 01, 2021 9:55 am I wonder about the risk rating of a well-diversified munis fund.

I believe the federal government would never allow large scale bankruptcies to happen without stepping in, and a few bankruptcies are not going to wipe out one's whole investment so as a whole they should recover in time.

Doesn't that make them almost as secure as federal government bonds?
That is the key assumption. But it could be extended at least partially to outright no question risk assets, like stocks or lower grade bonds, that the federal government can and will always bail out whoever and as much as necessary to avoid really big meltdowns. Which is a reason one might have a high allocation to risk assets. But in that case you might be less willing for your smaller allocation to 'riskless' assets to depend on the same assumption. I personally limit exposure to muni's to a fairly small portion of my low risk allocation and fairly short maturity. Although as is obvious this decision is influenced also by tax. For me muni's are generally close to best CD's after tax (therefore generally significantly superior to treasuries though right now best CD's are at a multi-yr low in spread to treasuries). If my tax situation was such that muni's were far superior to best CD's after tax, it would naturally have some influence on my decision at the margin.

Anyway that's the key assumption on which people can have different views. Historical default rate in contrast is of quite limited relevance IMO, and few people now buy individual muni's where overconcentration in a few names is even possible, so extolling the virtues of muni bond fund diversification is kind of a straw man argument. Potential systemic problems are the issue and in the long term past municipalities didn't make the kind of big long term commitments (pension/health for retired employees) they have more recently, and government at all levels was just smaller. Although that's not me saying muni's are doomed. I assume the market is basically efficient and it's priced very far from that being the expected case. However again in the 'left tail' of things going very, very badly in general I want to limit my reliance on the assumption of limitless US federal bailouts being able to save everything. Someday 'stepping in' might still allow significant losses to investors deemed to be 'paying their fair share' in suffering them. I'm willing to assume good things when buying risk assets, or I wouldn't buy them. I hold deviations from 'riskless' on the low risk side of things to a different standard.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

Rick Ferri wrote: Wed Dec 01, 2021 10:01 am The Vanguard Vanguard Intermediate-Term Tax-Exempt Fund holds 13,338 individual bonds from all 50 states. Investors do not need to worry about the safety of their principal.
Okay, but it's important for an investor to know that during March of 2020 the fund dropped 10%.

If you want to rebalance into stocks, or are expecting the money to be "safe" in a crisis, having at least some treasuries would be a good idea.

That's been the advice of Bill Bernstein.

"...take a look at what happened to the Vanguard muni bond funds did the first 10 months of 2008. You can easily do this with with Yahoo finance. Then look at what treasurys did during the same period. When I buy at the stock fire sale, I don't want to take a bond haircut to do so."

viewtopic.php?t=175804#p2659058
etfan
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by etfan »

JackoC wrote: Wed Dec 01, 2021 11:32 am Potential systemic problems are the issue and in the long term past municipalities didn't make the kind of big long term commitments (pension/health for retired employees) they have more recently, and government at all levels was just smaller.
Thanks for the insights. And this is very true.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by 000 »

I don't think so. Relying on the Federal Government to bail out munis in a crisis is foolish as it may better suit the Federal Government's purposes to let municipal credit go bankrupt in order to further centralize power away from state / local entities.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Chris K Jones »

CFM300 wrote: Wed Dec 01, 2021 1:03 pm
Rick Ferri wrote: Wed Dec 01, 2021 10:01 am

Okay, but it's important for an investor to know that during March of 2020 the fund dropped 10%.



I owned this fund at that time and was surprised by that drop. FWIW, I now limit my municipals to 25% of my fixed income holdings.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Rick Ferri »

CFM300 wrote: Wed Dec 01, 2021 1:03 pm
Rick Ferri wrote: Wed Dec 01, 2021 10:01 am The Vanguard Vanguard Intermediate-Term Tax-Exempt Fund holds 13,338 individual bonds from all 50 states. Investors do not need to worry about the safety of their principal.
Okay, but it's important for an investor to know that during March of 2020 the fund dropped 10%.

If you want to rebalance into stocks, or are expecting the money to be "safe" in a crisis, having at least some treasuries would be a good idea.

That's been the advice of Bill Bernstein.

"...take a look at what happened to the Vanguard muni bond funds did the first 10 months of 2008. You can easily do this with with Yahoo finance. Then look at what treasurys did during the same period. When I buy at the stock fire sale, I don't want to take a bond haircut to do so."

viewtopic.php?t=175804#p2659058
If you're concerned about illiquidity for one or two days, then you'll need to leave all your fixed-income assets in Treasuries. If you don't need all your fixed-income money immediately, then you can wait out the illiquidity discount.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

Rick Ferri wrote: Wed Dec 01, 2021 6:37 pm If you're concerned about illiquidity for one or two days, then you'll need to leave all your fixed-income assets in Treasuries. If you don't need all your fixed-income money immediately, then you can wait out the illiquidity discount.
The issue isn't liquidity. It's having to accept a substantial bond haircut in order to rebalance into stocks. Quoting Bernstein (again): "When I buy at the stock fire sale, I don't want to take a bond haircut to do so."
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by BolderBoy »

CFM300 wrote: Wed Dec 01, 2021 8:56 pm
Rick Ferri wrote: Wed Dec 01, 2021 6:37 pm If you're concerned about illiquidity for one or two days, then you'll need to leave all your fixed-income assets in Treasuries. If you don't need all your fixed-income money immediately, then you can wait out the illiquidity discount.
The issue isn't liquidity. It's having to accept a substantial bond haircut in order to rebalance into stocks. Quoting Bernstein (again): "When I buy at the stock fire sale, I don't want to take a bond haircut to do so."
Oughtn't one do one's rebalancing in a tax-advantaged account? Doing it in a taxable account should be an option of last resort.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Rick Ferri »

CFM300 wrote: Wed Dec 01, 2021 8:56 pm
Rick Ferri wrote: Wed Dec 01, 2021 6:37 pm If you're concerned about illiquidity for one or two days, then you'll need to leave all your fixed-income assets in Treasuries. If you don't need all your fixed-income money immediately, then you can wait out the illiquidity discount.
The issue isn't liquidity. It's having to accept a substantial bond haircut in order to rebalance into stocks. Quoting Bernstein (again): "When I buy at the stock fire sale, I don't want to take a bond haircut to do so."
Well then wait to rebalance. The illiquidity discount doesn't last more than a day a two.

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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

BolderBoy wrote: Wed Dec 01, 2021 9:37 pm Oughtn't one do one's rebalancing in a tax-advantaged account? Doing it in a taxable account should be an option of last resort.
Tax-advantaged accounts are 100% bonds. But that's not sufficient for my desired bond allocation. Thus, some bonds have to be held in taxable. Which is the only reason I'm holding munis in the first place.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Explorer »

Being "safe" is a relative term... but municipalities will remain solvent OR will be made solvent. So, I personally do not worry about muni safety.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

Rick Ferri wrote: Wed Dec 01, 2021 9:50 pm Well then wait to rebalance. The illiquidity discount doesn't last more than a day a two.
Vanguard's Intermediate-Term Tax-Exempt Fund dropped 10% over a two-week period in March 2020, and over an 8-month period in 2008. That's not my idea of a safe bond fund.

Regardless, my main point was merely that people should be aware that such is possible with munis. I wasn't, and so was quite surprised by the drop in 2020. It's tough to see your bonds declining substantially when your stocks are as well. Definitely didn't help me sleep at night.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Rick Ferri »

CFM300 wrote: Wed Dec 01, 2021 10:03 pm
Rick Ferri wrote: Wed Dec 01, 2021 9:50 pm Well then wait to rebalance. The illiquidity discount doesn't last more than a day a two.
Vanguard's Intermediate-Term Tax-Exempt Fund dropped 10% over a two-week period in March 2020, and over an 8-month period in 2008. That's not my idea of a safe bond fund.

Regardless, my main point was merely that people should be aware that such is possible with munis. I wasn't, and so was quite surprised by the drop in 2020. It's tough to see your bonds declining substantially when your stocks are as well. Definitely didn't help me sleep at night.
It's a fallacy to believe that Treasury bonds are a safe haven when stocks fall. In the 1970s, Treasury securities went down right along with stocks. If you're looking for a riskless return, you'll have to stay in the money market.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

Rick Ferri wrote: Thu Dec 02, 2021 6:43 am It's a fallacy to believe that Treasury bonds are a safe haven when stocks fall. In the 1970s, Treasury securities went down right along with stocks. If you're looking for a riskless return, you'll have to stay in the money market.
There are options between Intermediate-Term Tax-Exempt and money markets.

Here are the max drawdowns from Jan 1978 to Nov 2021 (which is as far back as data goes for Intermediate-Term Tax-Exempt in Portfolio Visualizer).

-25.14% - Intermediate-Term Tax-Exempt - Aug 79 to Sep 81 - recovered by Dec 82
-10.70% - Intermediate-Term Treasuries - Jul 79 to Feb 80 - recovered by Apr 80
-04.26% - Short-term Treasuries - Jul 80 to Nov 80 - recovered by Mar 81

Again, I would not call a bond fund that lost 25% of its value over more than two years, "safe."

Disclaimer: I do hold VG's California Intermediate-Term Tax-Exempt fund in my taxable account, along with treasuries.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by Rick Ferri »

If you're willing to accept low money-market type returns for many years so that you can perfectly rebalance in a downturn, then you'll lose more in opportunity cost from lower interest than you will gain in a rebalancing benefit.

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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

Rick Ferri wrote: Thu Dec 02, 2021 9:52 am Well then don't invest in municipals.
Again, it's not black or white.

The OP's question was: "But for someone in a high tax bracket, are munis “safe enough” to use as the core fixed income holding in one’s portfolio? Or should one consider pairing with Total Bond Market?"

My answer is that if you invest in munis, be prepared for steep drops that may last a couple of years. If that bothers you, consider pairing with a less risky bond fund, like treasuries.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by CFM300 »

Rick Ferri wrote: Thu Dec 02, 2021 9:52 am If you're willing to accept low money-market type returns for many years so that you can perfectly rebalance in a downturn, then you'll lose more in opportunity cost from lower interest than you will gain in a rebalancing benefit.
No one has suggested money markets. Why do you keep repeating this?

Bernstein's suggestion is treasuries, which is what I compared using Portfolio Visualizer.
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Re: Are Munis “safe enough” as a core fixed income holding?

Post by nordsteve »

Part of the disagreement in this thread is that there's not a shared definition of "safe".

For me, I accept that a risk of investing in bonds is that their value declines in periods of inflation. What I care about is whether there's a risk of default. I hold a muni bond fund and a muni EFT.

The bond fund is broadly diversified and has a higher 30 day yield, but takes more risk on its holdings, and has a higher expense ratio. The ETF is new, is much smaller, has much more concentrated, higher quality holdings. It has lower expenses and yield.
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