Why are Individual muni-bonds bad?
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Re: Why are Individual muni-bonds bad?
I prefer to use a bond broker for these. The person I work with knows the criteria I am looking for and that I will check on the price I am paying. There are websites where you can put the bond cusip number in to make sure you know that you are getting a fair deal. You can see what others are paying for the same bonds in the secondary markets. It is important to know what you are buying and at the present time, I am finding bond premiums have gone down significantly recently. For example, I recently bought a New York City water and sewer bond at par, with a 12 year maturity and a 7 year call from what I remember, that pays a 4% coupon. The same bonds were being sold at a 20% premium not long ago. Highly rated since if you don't pay your water and sewer bill, you know what happens. I think it is important to be selective and know what you are buying. There are times where buying opportunities exist in my opinion.
Re: Why are Individual muni-bonds bad?
If you, or anyone else, is serious about jumping into buying individual munis, I suggest doing what I did a number of years ago: call up your brokerage (while almost everything I have is with Vanguard, I did this with Fidelity), and ask them to generate a bond ladder for you. I had them run two - one a national muni with the same quality/maturity/duration as VWIUX (Vanguard National Muni), and another similar to VMATX (Vanguard MA muni). You will get a printout of the specific bonds, payouts, yield analysis from multiple perspectives, etc. FIdelity does not charge for this, but you have to execute these trades yourself, and then manage the ladder yourself. If you want them to do it, and continue the ladder on an ongoing basis, there is a charge.
Neither ladder was able to match the monthly payouts from these two funds, since almost all bonds were bought at a premium, you took capital losses when rolling the ladder, which were pretty significant. It was pretty clear the funds beat the ladders, my estimate was about .3% to .4% per year, pretty significant when you consider the yields, and only if you did this yourself. The bond broker who ran the ladders, when I asked why, acknowledged he could not beat these funds, and said that "Vanguard does a really good job with their muni funds". He went into this exercise believing he could do better than these funds.
I am not sure how the comparison would hold up during the past year, but before putting any real money into buying individual bonds, this is a good due diligence, all it costs is some of your time, and I personally learned a lot about individual muni bonds while doing this, and the biggest thing I learned was that a well managed bond fund is difficult to beat.
Another anecdote is that a friend of mine who is an investment manager was showing me a number of muni bonds they were buying for themselves and their clients and great rates during the 2020 downturn, saying this is why you buy individual bonds. My response was, sounds great, but what do I sell to buy these bonds ? Appreciated stock and pay a lot of taxes, or my current bond funds at a depressed price ? And then, when I do that, I significantly reduce my liquidity options and have to scramble to fund new bonds when the ones I buy expire or get called.
There is no free lunch
Neither ladder was able to match the monthly payouts from these two funds, since almost all bonds were bought at a premium, you took capital losses when rolling the ladder, which were pretty significant. It was pretty clear the funds beat the ladders, my estimate was about .3% to .4% per year, pretty significant when you consider the yields, and only if you did this yourself. The bond broker who ran the ladders, when I asked why, acknowledged he could not beat these funds, and said that "Vanguard does a really good job with their muni funds". He went into this exercise believing he could do better than these funds.
I am not sure how the comparison would hold up during the past year, but before putting any real money into buying individual bonds, this is a good due diligence, all it costs is some of your time, and I personally learned a lot about individual muni bonds while doing this, and the biggest thing I learned was that a well managed bond fund is difficult to beat.
Another anecdote is that a friend of mine who is an investment manager was showing me a number of muni bonds they were buying for themselves and their clients and great rates during the 2020 downturn, saying this is why you buy individual bonds. My response was, sounds great, but what do I sell to buy these bonds ? Appreciated stock and pay a lot of taxes, or my current bond funds at a depressed price ? And then, when I do that, I significantly reduce my liquidity options and have to scramble to fund new bonds when the ones I buy expire or get called.
There is no free lunch
Re: Why are Individual muni-bonds bad?
Agree!
"No man is free who must work for a living." (Illya Kuryakin)
Re: Why are Individual muni-bonds bad?
Water and sewer bondsOrthodoc1. wrote: ↑Wed May 25, 2022 11:00 am I prefer to use a bond broker for these. The person I work with knows the criteria I am looking for and that I will check on the price I am paying. There are websites where you can put the bond cusip number in to make sure you know that you are getting a fair deal. You can see what others are paying for the same bonds in the secondary markets. It is important to know what you are buying and at the present time, I am finding bond premiums have gone down significantly recently. For example, I recently bought a New York City water and sewer bond at par, with a 12 year maturity and a 7 year call from what I remember, that pays a 4% coupon. The same bonds were being sold at a 20% premium not long ago. Highly rated since if you don't pay your water and sewer bill, you know what happens. I think it is important to be selective and know what you are buying. There are times where buying opportunities exist in my opinion.
Birmingham Al defaulted on sewer bonds-one of the top 5 biggest bond defaults
https://www.kiplinger.com/article/inves ... s.html?amp
Nobody knows nothing applies to muni bond investing as well as other investing
Cheers
Grok
RIP Mr. Bogle.
- Mr. Potter
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Re: Why are Individual muni-bonds bad?
I am aware there is a default rate of .08% for US Munis. Even in the case of a default investors often recover part or all of their principal investment, yes it may take years but it's very unlikely you would lose 100% of your investment.Muni Bond Defaults and Bankruptcies Remain Rare
The five-year all-rated cumulative default rate (CDR) of municipal bonds throughout the study period (1970-2020) was unchanged at 0.08% and still remains very low. Aug 31, 2021
Re: Why are Individual muni-bonds bad?
And the default rate is even lower if you stick to shorter-term AA or AAA munis, which is what I did. Close to if not 0%, as I recall.Oak&Elm wrote: ↑Wed May 25, 2022 3:39 pmI am aware there is a default rate of .08% for US Munis. Even in the case of a default investors often recover part or all of their principal investment, yes it may take years but it's very unlikely you would lose 100% of your investment.Muni Bond Defaults and Bankruptcies Remain Rare
The five-year all-rated cumulative default rate (CDR) of municipal bonds throughout the study period (1970-2020) was unchanged at 0.08% and still remains very low. Aug 31, 2021
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: Why are Individual muni-bonds bad?
The law firm that handled the estate should have had software that could value them based on either the ticker symbol (probably not applicable for municipal bonds) or the CUSIP number.
- Mr. Potter
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Re: Why are Individual muni-bonds bad?
I received zero help from the lawyer who handled my parents estate, but I never asked and at the time I didn't know this was an issue. The 1st bond to be called was about 5 years after my Dad passed and he was not good at any sort of record keeping. When I met with my tax lady she asked what the cost basis was.... long pause, I was clueless. That first year we basically guessed at the cost basis. The issue was these bonds were purchased from various places, Banks, Brokerages, etc over many years. At some point my parents consolidated to Edward Jones. I know Ed Jones routinely gets bashed on this site but even though I had moved everything to Vanguard they dug deep in their archives and found 95% of the funds purchase prices. With that the tax nightmare became a non-issue. Thank you Edward Jones.The law firm that handled the estate should have had software that could value them based on either the ticker symbol (probably not applicable for municipal bonds) or the CUSIP number.
Last edited by Mr. Potter on Wed May 25, 2022 5:35 pm, edited 1 time in total.
Re: Why are Individual muni-bonds bad?
Shouldn’t the cost basis have been the value on the date the last parent died? In other words, while you still had a burden in figuring out the basis, the purchase info shouldn’t have been relevant.Oak&Elm wrote: ↑Wed May 25, 2022 5:27 pmI received zero help from the lawyer who handled my parents estate, but at the time I didn't know this was an issue. The 1st bond to be called was about 5 years after my Dad passed and he was not good at any sort of record keeping. When I met with my tax lady she asked what the cost basis was.... long pause, I was clueless. That first year we basically guessed at the cost basis. The issue was these bonds were purchased from various places, Banks, Brokerages, etc over many years. At some point my parents consolidated to Edward Jones. I know Ed Jones routinely gets bashed on this site but even though I had moved everything to Vanguard they dug deep in their archives and found 95% of the funds purchase prices. With that the tax nightmare became a non-issue. Thank you Edward Jones.The law firm that handled the estate should have had software that could value them based on either the ticker symbol (probably not applicable for municipal bonds) or the CUSIP number.
- Mr. Potter
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Re: Why are Individual muni-bonds bad?
Not sure if the Munis should have been repriced to a stepped up value on DOD, in hindsight that may have been the numbers Ed Jones provided. I was just happy to have a value with some legitamacy I didn't grab out of thin air. They were all close to the par value anyhow.Shouldn’t the cost basis have been the value on the date the last parent died? In other words, while you still had a burden in figuring out the basis, the purchase info shouldn’t have been relevant.
- Artsdoctor
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Re: Why are Individual muni-bonds bad?
The purchase prices of the munis are irrelevant. Edward Jones should have provided you with the value of the munis on the date of bond holder's death, which is something they can easily do (and is not reasonable to think that they didn't know to do this). If a bond value is greater than par on the date of death (stepped up basis), you'd amortize the coupon until the bond matures. If the bond is priced under par on the date of death (stepped down basis), then you'll owe regular income tax on the gain when it matures. You would want to check with your accountant on this.Oak&Elm wrote: ↑Wed May 25, 2022 5:27 pmI received zero help from the lawyer who handled my parents estate, but I never asked and at the time I didn't know this was an issue. The 1st bond to be called was about 5 years after my Dad passed and he was not good at any sort of record keeping. When I met with my tax lady she asked what the cost basis was.... long pause, I was clueless. That first year we basically guessed at the cost basis. The issue was these bonds were purchased from various places, Banks, Brokerages, etc over many years. At some point my parents consolidated to Edward Jones. I know Ed Jones routinely gets bashed on this site but even though I had moved everything to Vanguard they dug deep in their archives and found 95% of the funds purchase prices. With that the tax nightmare became a non-issue. Thank you Edward Jones.The law firm that handled the estate should have had software that could value them based on either the ticker symbol (probably not applicable for municipal bonds) or the CUSIP number.
Re: Why are Individual muni-bonds bad?
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Last edited by mary1492 on Fri Sep 30, 2022 4:33 am, edited 1 time in total.
Re: Why are Individual muni-bonds bad?
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Last edited by mary1492 on Fri Sep 30, 2022 4:33 am, edited 1 time in total.
Re: Why are Individual muni-bonds bad?
I can think of two reasons:
1) You want to actively trade (which is a bad idea, see haircut)
2) Market drops, you need to sell bonds to rebalance into stocks. Good reason to have other bonds as well, so you don't need to sell individual munis to do this.
3) You need the money. It can happen. You don't want to buy individual minis unless you're very unlikely to need to sell them before maturity.
"No man is free who must work for a living." (Illya Kuryakin)
Re: Why are Individual muni-bonds bad?
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Last edited by mary1492 on Fri Sep 30, 2022 4:32 am, edited 2 times in total.
Re: Why are Individual muni-bonds bad?
Again, this “capturing the premium” game adds to the “part time job” element of managing a portfolio of individual muni bonds. It’s not clear to me if, after capital gains tax, selling to capture a premium beats owning a fund and letting the fund manager deal with this. But, having actually owned a muni bond portfolio for years, I’m much happier to pay a few basis points to Vanguard to do this part time job for me.mary1492 wrote: ↑Fri May 27, 2022 5:08 amI would contend that avoiding, or justifying not purchasing individual bounds because of the potential spread you may open yourself to IF you had to sell is not the proper way to think about things.Elric wrote: ↑Thu May 26, 2022 8:30 pmI can think of two reasons:
1) You want to actively trade (which is a bad idea, see haircut)
2) Market drops, you need to sell bonds to rebalance into stocks. Good reason to have other bonds as well, so you don't need to sell individual munis to do this.
3) You need the money. It can happen. You don't want to buy individual minis unless you're very unlikely to need to sell them before maturity.
Personally, in my years of purchasing only individual munis, the only time I've sold is over the past two years when interest rates were at their lows and the premiums being paid for the bonds were so ridiculously high (YTM well under 2% for long term issues, and prices being paid well above mark-to-market) that it made sense to sell. I did not experience having to take a hair cut on any of my sales - I was ecstatic with all of my sales because of the gains I was booking...prices paid were going higher from the last trade. Further, on Fidelity's platform, the individual retail investor is able to post their own bonds setting the price - equal to or just under (by 0.001) the best dealer ask if he/she likes, and not requesting a bid. If you are forced to sell for some reason, well then of course you're going to have to settle for what comes back when you request a bid. However, again, avoiding an investment because of the potential that you will need to unwind it before you want is more a matter of bad planning, and not something I would recommend doing. Notwithstanding, even times when I've requested a bid during the insanity taking place with low rates, I've received solid bids - no haircuts when I've chose to accept them and sell. Aside from that, I always buy/hold my munis until maturity/call/redemption - because when I buy, it is because I am very happy with the yield to maturity/call, and fully intend to hold until the bonds are taken from me.
Re: Why are Individual muni-bonds bad?
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Last edited by mary1492 on Fri Sep 30, 2022 4:29 am, edited 1 time in total.
Re: Why are Individual muni-bonds bad?
Is the initial question in comparison to buying muni-bond funds?
It's ironic because I was just about to create a post myself asking if I am doing something "wrong" with bond funds in taxable accounts and whether or not it would be better to buy individual treasuries and/or munis.
The investment account, in question, is taxable and being a pretty conservative investor, I wanted to keep a decent amount in bonds for stability. It's roughly 50% stock index funds (80% VTSAX; 20% VTIAX) and 50% in NY (my state) muni funds (VNYTX) and 50% in short and intermediate treasuries funds. I did this versus total bond simply for tax purposes. My thought was that the muni funds would be a little bit more flexible compared to just buying munis (which my business partner suggested) from a broker and I thought that an average maturation date of 5-6 years or so would mean turn-over would be pretty good to avoid some of the "risk" issues with holding long-term bonds to maturity. Similar with treasuries. However, I was shocked to see what a beating I've taken on bonds in the last few months. They really seemed to offer very little stability and now I'm wondering how the funds will "bounce back" with holding intermediate length bonds and interest rates going all over the place?
Is my logic off when it comes to holding these funds? It seems the OP is thinking something similar when it comes to individual versus funds.
It's ironic because I was just about to create a post myself asking if I am doing something "wrong" with bond funds in taxable accounts and whether or not it would be better to buy individual treasuries and/or munis.
The investment account, in question, is taxable and being a pretty conservative investor, I wanted to keep a decent amount in bonds for stability. It's roughly 50% stock index funds (80% VTSAX; 20% VTIAX) and 50% in NY (my state) muni funds (VNYTX) and 50% in short and intermediate treasuries funds. I did this versus total bond simply for tax purposes. My thought was that the muni funds would be a little bit more flexible compared to just buying munis (which my business partner suggested) from a broker and I thought that an average maturation date of 5-6 years or so would mean turn-over would be pretty good to avoid some of the "risk" issues with holding long-term bonds to maturity. Similar with treasuries. However, I was shocked to see what a beating I've taken on bonds in the last few months. They really seemed to offer very little stability and now I'm wondering how the funds will "bounce back" with holding intermediate length bonds and interest rates going all over the place?
Is my logic off when it comes to holding these funds? It seems the OP is thinking something similar when it comes to individual versus funds.
Re: Why are Individual muni-bonds bad?
Read my comments earlier in this thread. My advice is to keep doing what you are doing. Buying and maintaining individual muni bonds is a part time job competing with full time professionals (your fund managers).DrHT wrote: ↑Fri May 27, 2022 10:13 am Is the initial question in comparison to buying muni-bond funds?
It's ironic because I was just about to create a post myself asking if I am doing something "wrong" with bond funds in taxable accounts and whether or not it would be better to buy individual treasuries and/or munis.
The investment account, in question, is taxable and being a pretty conservative investor, I wanted to keep a decent amount in bonds for stability. It's roughly 50% stock index funds (80% VTSAX; 20% VTIAX) and 50% in NY (my state) muni funds (VNYTX) and 50% in short and intermediate treasuries funds. I did this versus total bond simply for tax purposes. My thought was that the muni funds would be a little bit more flexible compared to just buying munis (which my business partner suggested) from a broker and I thought that an average maturation date of 5-6 years or so would mean turn-over would be pretty good to avoid some of the "risk" issues with holding long-term bonds to maturity. Similar with treasuries. However, I was shocked to see what a beating I've taken on bonds in the last few months. They really seemed to offer very little stability and now I'm wondering how the funds will "bounce back" with holding intermediate length bonds and interest rates going all over the place?
Is my logic off when it comes to holding these funds? It seems the OP is thinking something similar when it comes to individual versus funds.
Re: Why are Individual muni-bonds bad?
Your logic is reasonable. Individual bonds also gain and lose value as rates change, although you might not notice it as much. And in either case, you don't care much what happens to the value of your bonds, except on the day you buy and sell them. If the yield on a bond or bond fund with a 5-year duration rises by 2%, it loses 10% of its value, but if you then hold it for five years, you make 2% more per year than you were originally expecting, so your 5-year return will be the same as if rates never changed.DrHT wrote: ↑Fri May 27, 2022 10:13 am Is the initial question in comparison to buying muni-bond funds?
It's ironic because I was just about to create a post myself asking if I am doing something "wrong" with bond funds in taxable accounts and whether or not it would be better to buy individual treasuries and/or munis.
However, I was shocked to see what a beating I've taken on bonds in the last few months. They really seemed to offer very little stability and now I'm wondering how the funds will "bounce back" with holding intermediate length bonds and interest rates going all over the place?
Is my logic off when it comes to holding these funds? It seems the OP is thinking something similar when it comes to individual versus funds.
Re: Why are Individual muni-bonds bad?
Very interesting read on the individual muni bonds.
Trying to understand all the tax implications on the muni bonds. I understand that when I buy the individual muni bonds, either at discount or premium, at initial offering and hold to maturity, there is no capital gain. However, what if the bonds are called early before maturity? Is it a taxable event? Will the discount bonds trigger capital gains when called (or loss on the premium bonds)?
Trying to understand all the tax implications on the muni bonds. I understand that when I buy the individual muni bonds, either at discount or premium, at initial offering and hold to maturity, there is no capital gain. However, what if the bonds are called early before maturity? Is it a taxable event? Will the discount bonds trigger capital gains when called (or loss on the premium bonds)?
Re: Why are Individual muni-bonds bad?
that's not quite right. you might want to read up on the de minimus rule
https://www.pimco.com/en-us/resources/e ... -tax-rule/
cheers,wrote: For some municipal investors – particularly those in higher tax brackets – taxation of bond’s market discount can have a noteworthy impact on after-tax returns. For a discounted municipal security purchased at a price below the de minimis threshold, price accretion is subject to the ordinary income tax rate (43.4% for top earners1). Conversely, the accretion of a security purchased at a discount, but at a price above the de minimis boundary, is subject to a much lower capital gains tax rate (23.8% for top earners) if the bond is held for longer than one year. 2
grok
RIP Mr. Bogle.