Muni Bond Fund Declines
Muni Bond Fund Declines
Good morning
The Intermediate Muni Bond fund (along with hi yield) has dropped about 3% in value over the last 10 days -- quite a rapid change.
Be curious about opinions as to why -
Inflation risk
Risk to Bond Insurance coverage
Market dislocations - banks/hedges raising cash
Fears of credit risk of issuers
I would like to think it reflects 1 and 3 -- but would like to hear if folks think is reflects the second item ---
Finally, is this a buying opportunity, much like August 07 when bonds were dumped by banks as they ran to raise cash?
The Intermediate Muni Bond fund (along with hi yield) has dropped about 3% in value over the last 10 days -- quite a rapid change.
Be curious about opinions as to why -
Inflation risk
Risk to Bond Insurance coverage
Market dislocations - banks/hedges raising cash
Fears of credit risk of issuers
I would like to think it reflects 1 and 3 -- but would like to hear if folks think is reflects the second item ---
Finally, is this a buying opportunity, much like August 07 when bonds were dumped by banks as they ran to raise cash?
- indexfundfan
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I think that if inflation risk were the major factor, (non-TIPS) treasuries and munis of comparable duration would move in the same direction, since they have the same inflation risk exposure. SInce they've gone opposite ways for the last six months, I'd say that inflation isn't the major factor.
Best wishes,
Brad
Best wishes,
Brad
Most of my posts assume no behavioral errors.
- House Blend
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Not sure if its related, but there's an interesting article in today's SF Chronicle about unusual goings-on in the world of tax-exempt MMF's, which are more or less ultra short munis:
http://www.sfgate.com/cgi-bin/article.c ... VV8GLG.DTL
Note that they quote Vanguard's Pamela Tynan.
http://www.sfgate.com/cgi-bin/article.c ... VV8GLG.DTL
Note that they quote Vanguard's Pamela Tynan.
Thank you, House Blend - the article does apply --- states that mutual funds are dumping the insured bonds that are now naked and thus causing price falls and rate increases. This is similar to last summer in many ways ....Not sure if its related, but there's an interesting article in today's SF Chronicle
The real question is whether this market shift is worth the effort - do we have enough protection in the diversity of the Vanguard portfolio that the insurance status is not really relevant?
Brainstem said:
By coincidence I noticed yesterday that the "cost basis" in my Intermediate Muni fund showed a loss (I don't check every day...). I am thinking about selling the fund for a tax loss. Actually, I would simply transfer the money to another Muni bond fund and capture the loss. However, since I haven't held this fund for over six months, I believe most - if not all - of the loss would be disallowed for tax purposes. I switched into this fund in October 2007 (to capture a tax loss from another Muni fund), so I may have to wait until April to tax loss harvest.
Sorry - but I really don't follow this fund too closely, so I don't know why it went down....nor do I care. I don't try to time the markets, but I do try to take tax losses when they present themselves.
Best wishes.
I don't know. But it may be a selling opportunity.Finally, is this a buying opportunity, much like August 07 when bonds were dumped by banks as they ran to raise cash?
By coincidence I noticed yesterday that the "cost basis" in my Intermediate Muni fund showed a loss (I don't check every day...). I am thinking about selling the fund for a tax loss. Actually, I would simply transfer the money to another Muni bond fund and capture the loss. However, since I haven't held this fund for over six months, I believe most - if not all - of the loss would be disallowed for tax purposes. I switched into this fund in October 2007 (to capture a tax loss from another Muni fund), so I may have to wait until April to tax loss harvest.
Sorry - but I really don't follow this fund too closely, so I don't know why it went down....nor do I care. I don't try to time the markets, but I do try to take tax losses when they present themselves.
Best wishes.
Andy
- indexfundfan
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Thanks for the article. Quote:brainstem wrote:Thank you, House Blend - the article does apply --- states that mutual funds are dumping the insured bonds that are now naked and thus causing price falls and rate increases. This is similar to last summer in many ways ....Not sure if its related, but there's an interesting article in today's SF Chronicle
The real question is whether this market shift is worth the effort - do we have enough protection in the diversity of the Vanguard portfolio that the insurance status is not really relevant?
On Dec. 3, the average tax-free money market fund was yielding 3.06 percent - about 75 percent of the average taxable money fund yield of 4.1 percent.
A week ago, tax-free money funds were yielding a scant 1.41 percent - only 46 percent of the average taxable money fund yield of 3.05 percent, according to iMoneyNet. If that unusual relationship were to persist, tax-free money market funds wouldn't even make sense for the highest-income taxpayers.
Tax-free yields have improved since last week but are still abnormally low relative to taxables.
The steep decline caused many investors to pull their money out of these funds. Over the past two weeks, investors withdrew a total of $13 billion more than they put into tax-free money funds, according to AMG Data.
I guess I count as one of those who pulled money out from tax-exempt MMF to taxable MMF recently.
My signature has been deleted.
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We tend to grouse when our funds decline "in excess" of expectations.
I bought VG Intermediate Muni 3 weeks ago so of course I am a little chagrined about the recent "poor performance". However, I tell myself that things are actually going according to plan. My TSM and total international market investments have done well over the same time period - there's that negative correlation we investors seek. I also have Short-Term Bond Index in my taxable account because federal, corporate and municipals do behave differently.
So you can say that the Muni funds have been offering diversification lately. The price declines may be fleeting because Munis are looking even cheaper compared to Treasuries. I may add a little to my position.
I bought VG Intermediate Muni 3 weeks ago so of course I am a little chagrined about the recent "poor performance". However, I tell myself that things are actually going according to plan. My TSM and total international market investments have done well over the same time period - there's that negative correlation we investors seek. I also have Short-Term Bond Index in my taxable account because federal, corporate and municipals do behave differently.
So you can say that the Muni funds have been offering diversification lately. The price declines may be fleeting because Munis are looking even cheaper compared to Treasuries. I may add a little to my position.
- hollowcave2
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rates
It could be that interest rates have crept upward in the longer end of the yield curve, steepening the curve as the short end experienced declining rates. The Fed only directly controls the ultra short end of the curve... the market reacts with the rest of the yield curve. It seems like future rates are expecting a bit more inflation, something that has been reported today.
If you are a long term holder of a bond fund, slowly increasing rates are good because you will ultimately get a higher total return due to the increased income.
Steve
If you are a long term holder of a bond fund, slowly increasing rates are good because you will ultimately get a higher total return due to the increased income.
Steve
Here's another explanation on the dislocation of the muni bond markets:
TOBs drive up volume of muni variable rate ratings
The anomalies occurred in August, November, January and apparently during the last few days. TOBs (muni bonds derivatives) are widely used by tax exempt money market funds to juice up the yield a little bit.
Variable-Rate Note Market Now Freezing-Sources
TOBs drive up volume of muni variable rate ratings
The anomalies occurred in August, November, January and apparently during the last few days. TOBs (muni bonds derivatives) are widely used by tax exempt money market funds to juice up the yield a little bit.
In addition, now the variable rate demand note market appears to be freezing up:NEW YORK, Jan 18 (Reuters) - Demand from tender-option-bond programs during a volatile period helped trigger a big spike in demand for municipal variable rate debt ratings, Standard & Poor's Ratings Services said on Friday,
In the 2007 fourth quarter, the credit agency said it rated more such debt in the secondary market than in any previous year since it started this program in 1993.
The variable rate debt is issued by third parties, including tender-option-bond programs or trusts, that securitize municipal bonds.
Since the massive reevaluation of credit risk that began last August, the U.S. municipal market has seen waves of selling by tender-option-bond programs.
Muni traders fear billions more dollars of tax-free bonds will hit the market if more of these programs close positions due to fears that a bond insurer will lose the top "AAA" rating.
Variable-Rate Note Market Now Freezing-Sources
NEW YORK (Reuters) - Major banks, including UBS AG (UBSN.VX: Quote, Profile, Research) and Citigroup (C.N: Quote, Profile, Research), are making it harder for clients to sell what was considered one of the safest alternatives to cash -- so-called variable-rate demand notes -- sources familiar with industry practices say.
"I heard everybody's doing it," one of the sources said on Monday.
Previously, investors who wanted to sell these floating- rate notes just had to contact the banks, which would either resell the debt or salt it away in their inventory.
But now, because banks are afraid of taking on any more risk, they are taking advantage of the slower and more cumbersome procedures spelled out in the debt's legal papers, which oblige would-be sellers to go through the tender agents.
As a result, this $400 billion market is starting to freeze up -- much like the market for auction-rate paper -- as the banks put their need to save cash ahead of the investors' desire for them to buy their debt to keep the market liquid.
One of the main culprits causing the market for variable-rate demand notes to seize up is the troubled bond insurers that guarantee them. This is the same factor that has caused the $330 billion auction-rate note market to get hit with billions of dollars of failed auctions every day since late January.
Good question brainstem.brainstem wrote:Thank you, House Blend - the article does apply --- states that mutual funds are dumping the insured bonds that are now naked and thus causing price falls and rate increases. This is similar to last summer in many ways ....Not sure if its related, but there's an interesting article in today's SF Chronicle
The real question is whether this market shift is worth the effort - do we have enough protection in the diversity of the Vanguard portfolio that the insurance status is not really relevant?
CA IT TE has lost 4% in 4 weeks while taxable funds have moved the other way.
One way to look at this is CA IT TE has lost more than one year's worth of yield based on current yields.
It's not clear to me that we do have protection in the Vanguard portfolio and whether it is "safe" to be in the tax exempt funds given the conditions in the muni market.
I hope Larry and others might offer their opinions on where things are headed.
- Paladin
Over the years, I've come to the conclusion that there are way too many things that influence the price of bond funds to put your finger on just one or two as the driver for price changes. Moreover, what action can you take? Buy, sell or hold is about it.
Being CA residents we've owned various CA tax exempt issues. Our reasons for owning are simply for income. I have found trading bond funds requires greater timing skills than I possess (guess how I learned that lesson). Individual issues are bought & held until called. You've got to be really good & really quick to make money trading in bonds.
Buying opportunity? How many times have we been reminded that there is no bad time to make a good investment?
dougP
Being CA residents we've owned various CA tax exempt issues. Our reasons for owning are simply for income. I have found trading bond funds requires greater timing skills than I possess (guess how I learned that lesson). Individual issues are bought & held until called. You've got to be really good & really quick to make money trading in bonds.
Buying opportunity? How many times have we been reminded that there is no bad time to make a good investment?
dougP
no matter where you go, there you are
Has the world gone crazy? According to Bloomberg
10-year Treasury yields 3.64
10-year Municipal yields 3.67
CA LT TE dropped -1.19% today
since Feb 11 it's down from 11.47 to 10.89 about 5%
The last time it dropped this low was 2000
This has got to be the bargain of the 21st century
Some weird stuff is going on.
10-year Treasury yields 3.64
10-year Municipal yields 3.67
CA LT TE dropped -1.19% today
since Feb 11 it's down from 11.47 to 10.89 about 5%
The last time it dropped this low was 2000
This has got to be the bargain of the 21st century
Some weird stuff is going on.
I agree- A 10 year Wisconsin AA- G.O. bond traded at around 4.785%. 10 year treasury is at 3.7%. So 100 bps over treasuries!grayfox wrote:Has the world gone crazy? According to Bloomberg
10-year Treasury yields 3.64
10-year Municipal yields 3.67
CA LT TE dropped -1.19% today
since Feb 11 it's down from 11.47 to 10.89 about 5%
The last time it dropped this low was 2000
This has got to be the bargain of the 21st century
Some weird stuff is going on.
cheers
grok
When I see these "obvious mispricings" I always wonder which of two scenarios makes more sense:
1. Someone knows something bad about the seemingly cheap security (or class of securities). For example, maybe county X or state Z is in serious trouble and about to default on some bonds.
2. Someone else is in trouble and dumping whatever they can to raise capital, creating a temporarily inefficient market. For example, maybe the Sludge & Dregs Hedge Fund made a bad and highly leveraged bet on Guano & Crap Mining Co, and is now selling their conservative Milwaukee Sewer Authority bonds at a deep discount to raise capital, sending flu-liking shivers and leaks through the muni world.
How can I tell which witch is which? I can't! Is it an efficient market? Hell no, not at present! But I know that the smart money is keeping quiet about the real opportunity and mispricings until after they've milked the inefficiency for every d**n cent they can!
1. Someone knows something bad about the seemingly cheap security (or class of securities). For example, maybe county X or state Z is in serious trouble and about to default on some bonds.
2. Someone else is in trouble and dumping whatever they can to raise capital, creating a temporarily inefficient market. For example, maybe the Sludge & Dregs Hedge Fund made a bad and highly leveraged bet on Guano & Crap Mining Co, and is now selling their conservative Milwaukee Sewer Authority bonds at a deep discount to raise capital, sending flu-liking shivers and leaks through the muni world.
How can I tell which witch is which? I can't! Is it an efficient market? Hell no, not at present! But I know that the smart money is keeping quiet about the real opportunity and mispricings until after they've milked the inefficiency for every d**n cent they can!
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)
A Wall Street Journal Article from today...
Apparently it's variable-rate demand notes, as opposed to (or more precisely, in addition to) auction rate securities:
New Monkey, Same Backs
Another Debt Market For Governments Loses Buyers, and Rates Rise
Also, many issuers of the variable rate debt are trying to refinance--issue new bonds at fixed rates. That will probably flood the market and drive up yields.
I must say, these last six months I've learned a lot more about some very esoteric financial instruments than I ever thought I would, or would have cared to.
"May you live in interesting times"
Best wishes,
Brad
PS: Yes, I've put some more money into Vanguard's muni funds this week.
Apparently it's variable-rate demand notes, as opposed to (or more precisely, in addition to) auction rate securities:
New Monkey, Same Backs
Another Debt Market For Governments Loses Buyers, and Rates Rise
Those are just some excerpts from the article...the whole thing is definitely a good read.This time, the culprits are variable-rate demand notes. And banks that guarantee they will act as buyers of last resort face something they never expected -- having to purchase many of them at once.
Like auction-rate securities, interest payments adjust on a weekly or even daily basis. The difference is that for variable-rate demand notes, securities firms sell the debt at whatever interest rate meets the market's demand.
...an increasing number of municipalities are being hit with sharply higher interest on their variable-rate demand notes because dealers of the debt are having trouble selling it.
Last week, rates on $300 million of California's variable-rate demand notes rose to 8.25% from 2% the previous week. "This is an amazing confluence of problems that no one expected to happen," California Deputy Treasurer Paul Rosenstiel said.
"The entire floating-rate [municipal bond] market is in disarray," said Michael J. Marz, vice chairman at First Southwest Co., a Dallas financial adviser to governments and municipalities. There are about $500 billion of variable-rate demand notes in the market compared with an estimated $330 billion of auction-rate securities.
Money-market funds, which have strict rules on the kinds of securities they can buy, usually are major participants in the variable-rate demand notes market. Many such funds have 70% or more of their assets invested in those securities.
But their interest is waning because of wariness about any securities backed by bond insurance...
Also, many issuers of the variable rate debt are trying to refinance--issue new bonds at fixed rates. That will probably flood the market and drive up yields.
I must say, these last six months I've learned a lot more about some very esoteric financial instruments than I ever thought I would, or would have cared to.
"May you live in interesting times"
Best wishes,
Brad
PS: Yes, I've put some more money into Vanguard's muni funds this week.
Most of my posts assume no behavioral errors.
1987 Decline in Municipal Bonds
The 1987 period saw two large declines in the Municipal Bond Market, and both drops were in the range of 10%. Hopefully we won't reach that extreme this time.
http://bigcharts.marketwatch.com/quickc ... =2&time=20
The next link is an explanation written in 1991.
Sounds a lot like the current situation.
http://money.cnn.com/magazines/moneymag ... /index.htm
Kent
http://bigcharts.marketwatch.com/quickc ... =2&time=20
The next link is an explanation written in 1991.
Sounds a lot like the current situation.
http://money.cnn.com/magazines/moneymag ... /index.htm
Kent
Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/news?pid= ... refer=home
Bob U.
Bob U.
Useful, Bob U
Since my first post, I have thought of other options related to the accelerated price decline:
Inflation risk
Risk to Bond Insurance coverage
Market dislocations - banks/hedges raising cash
Fears of credit risk of issuers
Investor withdrawals - forcing sales
Revaluation of toxic securities
Vanguard has stated it has been careful in its investments (at least in CDOs and CMOs) but perhpas it was in some auction rate material - on the other hand, with its size, holding auction rate securities should not be much of a problem -- unless a secondary market would force an accounting repricing that might not be relevant if the security was held to maturity (granted in 15 years)
So this could be a supply and demand phenom - but if rates keep going up, one would thing it will attract buyers to take advantage of its return vs taxable securities
Since my first post, I have thought of other options related to the accelerated price decline:
Inflation risk
Risk to Bond Insurance coverage
Market dislocations - banks/hedges raising cash
Fears of credit risk of issuers
Investor withdrawals - forcing sales
Revaluation of toxic securities
Vanguard has stated it has been careful in its investments (at least in CDOs and CMOs) but perhpas it was in some auction rate material - on the other hand, with its size, holding auction rate securities should not be much of a problem -- unless a secondary market would force an accounting repricing that might not be relevant if the security was held to maturity (granted in 15 years)
So this could be a supply and demand phenom - but if rates keep going up, one would thing it will attract buyers to take advantage of its return vs taxable securities
I know munis have been unusually volatile over the past couple of weeks, but I've owned the Vanguard IT Muni Fund (or whatever they are calling it these days - VWITX) for a long time and in spite of all the angst, it's only down 2% YTD. I have equity funds that have dropped by that in a single day before.
Bond fund returns have two components - capital return - as the values of the bonds increase or decrease - and income return - as the bonds pay interest. Right now, capital returns on munis are negative. In fact, they suck. But, future income returns are increasing.
So, I personally am not getting too bent out of shape about this. Bond funds do go down sometimes, but everytime the price drops, the yield increases, which benefits you in the long run.
Ken
Bond fund returns have two components - capital return - as the values of the bonds increase or decrease - and income return - as the bonds pay interest. Right now, capital returns on munis are negative. In fact, they suck. But, future income returns are increasing.
So, I personally am not getting too bent out of shape about this. Bond funds do go down sometimes, but everytime the price drops, the yield increases, which benefits you in the long run.
Ken
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1. collapse of the auction rate securities market - municipalities can't borrow.bob u. wrote:Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/news?pid= ... refer=home
Bob U.
2. I think a California municipality just defaulted?
3. most munis are extremely illiquid: a small change in sentiment can cause a big change in price. Those market makers holding munis won't want to get caught, so they will aggressively price down their inventories.
4. recurrent chaos re municipal bond insurers, causing investors to worry about getting repaid.
It's probably a buying opportunity, in the sense that the historic default rates for munis are much better (10X ?) than corporates of the same investment grade.
However, always, there is the problem of risk spread. If a state's whole economy is impacted, it may make that state's default rate higher than historic average.
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This should provide a floor for munis. With the Fed saying that additional rate cuts are probably on the way, investors are going to be starving for yield.brainstem wrote: So this could be a supply and demand phenom - but if rates keep going up, one would thing it will attract buyers to take advantage of its return vs taxable securities
If you are in the 25% tax bracket - which is not "high income" - IT Tax-Exempt has a 128bp yield advantage over IT Treasury. That's a decent premium considering the (limited) default risks.
Of course this is not about defaults, this is about liquidity, and Treasuries are kings of the moment.
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Muni bond sell off
Another external force right now on Munis are closed ended funds. There are a lot of closed-ended muni bond funds, and they typically are leveraged at about 25%. With the bond insurer "scare", the interest rate on the margin money is going up, so leveraging is not working as well. The closed-ended funds sell some munis to pay back the margin, which puts pressure on muni bond prices, which causes the margin to get bigger again, and you know this spiral.
According to Vanguard, the Intermediate Tax-Exempt fund does not hold auction rate securities, or floating notes, or whatever new acronym will surface next week in the Wall Street Journal.
They told me they hold only plain vanilla municipal bonds, and that Vanguard does its own credit analysis -- and chooses not to rely on rating agencies like S&P, etc. to assess credit worthiness.
I asked Vanguard last night if there were any holdings in the Intermediate Tax-Exempt fund which would be permanently impaired. (that is, would not recover once the market recovered.) They said there was not -- there had been no defaults, and they were not expecting any.
We're sitting tight and waiting for the storm to pass.
They told me they hold only plain vanilla municipal bonds, and that Vanguard does its own credit analysis -- and chooses not to rely on rating agencies like S&P, etc. to assess credit worthiness.
I asked Vanguard last night if there were any holdings in the Intermediate Tax-Exempt fund which would be permanently impaired. (that is, would not recover once the market recovered.) They said there was not -- there had been no defaults, and they were not expecting any.
We're sitting tight and waiting for the storm to pass.
This is what I gather from that particular article:bob u. wrote:Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/news?pid= ... refer=home
Bob U.
1. Auction-rate securities market is broken (not really frozen) because dealer/brokers are no longer offering a backstop for liquidity.
2. Municipals that are using that market to pay short-term rates for long-term borrowing are getting trapped with high rates because of the failed auctions.
3. Municipals therefore need to refinance, re-issue debt via conventional long-term securities and abandon that auction market.
4. The plans for municipals to do this are moving forward, though it's not a fast process.
5. Some holders (banks, funds, hedge funds, etc.) of municipals expect a glut of supply (and it might be already there) which would drive yields higher. Therefore they decide to sell now since the market is not very liquid and it can get worse. The selling vicious cycle must be in place as the collapsing prices show.
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Global Bond
I wish Vanguard had a (developed world) global bond fund. Many of those funds are up 10%+ YTD, and nicely offset the whole inflation/currency/ debasement issue. They pay 5-7%, but the fees are too high from other vendors, and I think Vanguard could easily beat the fees. Yes, they are foreign, but if done right, they are relatively safe. (I am not too worried about Norway or New Zealand Government bonds having trouble.) Besides, some countries believing in protecting their currency and tough out the downturns, which helps the savers.
Re: Global Bond
I share your wish. Until they come out with one, you might consider BWX- ishares ETF for foreign developed government bonds- 0.5% e.r.nofreelunches wrote:I wish Vanguard had a (developed world) global bond fund. Many of those funds are up 10%+ YTD, and nicely offset the whole inflation/currency/ debasement issue. They pay 5-7%, but the fees are too high from other vendors, and I think Vanguard could easily beat the fees. Yes, they are foreign, but if done right, they are relatively safe. (I am not too worried about Norway or New Zealand Government bonds having trouble.) Besides, some countries believing in protecting their currency and tough out the downturns, which helps the savers.
cheers
grok
Re: Muni bond sell off
This is also a factor. Closed end funds must be selling their bond holdings for various reasons. They do issue auction-rate preferred shares for leverage and they must be getting caught with liquidity problems also.nofreelunches wrote:Another external force right now on Munis are closed ended funds. There are a lot of closed-ended muni bond funds, and they typically are leveraged at about 25%. With the bond insurer "scare", the interest rate on the margin money is going up, so leveraging is not working as well. The closed-ended funds sell some munis to pay back the margin, which puts pressure on muni bond prices, which causes the margin to get bigger again, and you know this spiral.
It sounds like the price drops are because of problems with those insuring the bonds, right?
But muni bonds very rarely default, so wouldn't that mean the insurance is largely superfluous? Is there some other reason to be more concerned about muni defaults now than a year ago?
Or is this largely a question of liquidity and a short term supply/demand imbalance in this market segment?
===
I'm considering moving some money into munis, probably on a relatively short term basis. But I have a few questions about Vanguard's muni offerings...
1) If I look on Vanguard's web site, I see "SEC Yield", with a footnote that, when I click on it, says it's based on YTM for the last 30 days. But if prices have fallen sharply in the last week or so, then the actual current yields (as of today) would likely be higher, right?
2) Muni bond markets are relatively illiquid. I'm guessing that Vanguard determines the daily NAV of its funds based not entirely on what the bonds within those funds traded at, but also based on some models (many of the individual bonds probably trade rarely). This introduces the possibility of stale pricing. When the markets barely move, that's not too important, but in a sharply falling market, if Vanguard's prices are a little bit stale, then the NAV could be a bit higher than it could/should be, meaning someone buying a muni bond fund now is overpaying. On the other hand, I generally trust Vanguard. Is there a real risk of stale pricing here?
3) Momentum. It seems to me there is a risk of momentum in a small-ish, thinly traded market. Should I be worried about this if I'm thinking about moving into muni funds?
But muni bonds very rarely default, so wouldn't that mean the insurance is largely superfluous? Is there some other reason to be more concerned about muni defaults now than a year ago?
Or is this largely a question of liquidity and a short term supply/demand imbalance in this market segment?
===
I'm considering moving some money into munis, probably on a relatively short term basis. But I have a few questions about Vanguard's muni offerings...
1) If I look on Vanguard's web site, I see "SEC Yield", with a footnote that, when I click on it, says it's based on YTM for the last 30 days. But if prices have fallen sharply in the last week or so, then the actual current yields (as of today) would likely be higher, right?
2) Muni bond markets are relatively illiquid. I'm guessing that Vanguard determines the daily NAV of its funds based not entirely on what the bonds within those funds traded at, but also based on some models (many of the individual bonds probably trade rarely). This introduces the possibility of stale pricing. When the markets barely move, that's not too important, but in a sharply falling market, if Vanguard's prices are a little bit stale, then the NAV could be a bit higher than it could/should be, meaning someone buying a muni bond fund now is overpaying. On the other hand, I generally trust Vanguard. Is there a real risk of stale pricing here?
3) Momentum. It seems to me there is a risk of momentum in a small-ish, thinly traded market. Should I be worried about this if I'm thinking about moving into muni funds?
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Re: Global Bond
Actually New Zealand is quite a risky bond market.nofreelunches wrote:I wish Vanguard had a (developed world) global bond fund. Many of those funds are up 10%+ YTD, and nicely offset the whole inflation/currency/ debasement issue. They pay 5-7%, but the fees are too high from other vendors, and I think Vanguard could easily beat the fees. Yes, they are foreign, but if done right, they are relatively safe. (I am not too worried about Norway or New Zealand Government bonds having trouble.) Besides, some countries believing in protecting their currency and tough out the downturns, which helps the savers.
It's a favourite of the 'carry trade' of borrowing in Japan, and investing in Iceland or New Zealand (8-9% bond rates).
So the currency risk on NZ is huge (and the cost of hedging that risk equivalently huge since the cost of currency hedging is just the interest rate differential between 2 currencies).
I think most countries find it impossible to protect their exchange rate, if the hurricane winds hit.
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Re: Global Bond
Amen! Sing it brother! I hope VG is reading this.nofreelunches wrote:I wish Vanguard had a (developed world) global bond fund. Many of those funds are up 10%+ YTD, and nicely offset the whole inflation/currency/ debasement issue. They pay 5-7%, but the fees are too high from other vendors, and I think Vanguard could easily beat the fees. Yes, they are foreign, but if done right, they are relatively safe. (I am not too worried about Norway or New Zealand Government bonds having trouble.) Besides, some countries believing in protecting their currency and tough out the downturns, which helps the savers.
I have GIM. It has been good to me. I'd rather have a VG fund though. I cannot see having all investments be dollar-based (undiversified), whether we are in good times or bad in the US. The past couple years are proof enough to me.
Perhaps related, perhaps not, the SEC has also been investigating a lot of questionable goings-on in the municipal bond market. This is almost certainly good in the long run, but may have a temporary chilling effect on market makers, right at the moment when liguidity is in the most demand.
link1
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Best wishes,
Brad
link1
link2
Best wishes,
Brad
Most of my posts assume no behavioral errors.
Well, yes and no. Would I bet on the solvency of a municipal bond issuer with a AA rating and the authority to levy taxes, particularly for general obligation bonds supported by tax revenues? Or on an insurer with a nominal AAA rating who has insured a pile of subprime junk? Definitely the former!psteinx wrote:It sounds like the price drops are because of problems with those insuring the bonds, right?
But muni bonds very rarely default, so wouldn't that mean the insurance is largely superfluous? Is there some other reason to be more concerned about muni defaults now than a year ago?
The problem is that in many cases, for institutional entities, holding only AAA bonds in mandated by law, never mind that AA munis are almost certainly more secure than AAA investment grade bonds--or AAA rated bond insurers.
Best wishes,
Brad
Most of my posts assume no behavioral errors.
This article from Reuters does a nice job summarizing recent troubles in the municipal bond market:
http://www.reuters.com/article/reutersE ... 3120080228
http://www.reuters.com/article/reutersE ... 3120080228
BTW, I'm not so sure that muni bond prices are true random walks.
Look at the price history of VWLTX:
http://finance.yahoo.com/q/hp?s=VWLTX
From 2/11/08 to 2/28/08 (the most recent date shown), prices have fallen 12 straight times.
The odds of this happening by pure chance are, I think, 1 in 4096 - i.e. if there are 250 trading days in a year, we should see stretches of 12 straight down days about once every 16 years. It's possible that in fact this is just bad luck - a once in every 16 years sequence of bad trading days. But it's also possible that there's a momentum effect going on...
Look at the price history of VWLTX:
http://finance.yahoo.com/q/hp?s=VWLTX
From 2/11/08 to 2/28/08 (the most recent date shown), prices have fallen 12 straight times.
The odds of this happening by pure chance are, I think, 1 in 4096 - i.e. if there are 250 trading days in a year, we should see stretches of 12 straight down days about once every 16 years. It's possible that in fact this is just bad luck - a once in every 16 years sequence of bad trading days. But it's also possible that there's a momentum effect going on...
- drjdpowell
- Posts: 882
- Joined: Thu Mar 01, 2007 7:56 pm
I don't know. Given that the taxpayers are also the voters in the municipality, they have the ultimate authority to elect someone who will default on the loan. What rights do Muni bond investors have as far a forcing municipalities to pay if the voters refuse?baw703916 wrote:Would I bet on the solvency of a municipal bond issuer with a AA rating and the authority to levy taxes, particularly for general obligation bonds supported by tax revenues?
-- James
California will auction $1.7 billion in G.O. bonds next week. They have a new program wherein individuals get first crack (thru brokers & VG handles thru Pershing) and then the institutions. I believe the previous issue attracted roughly half it's subscriiptions from individuals. It will be interesting to see the trend next week on proportion purchased by individuals. Maybe a gauge of small investor confidence?
dougP
dougP
no matter where you go, there you are
Re: Global Bond
gim has em. If you don't want em, bwx is better.snowman9000 wrote:Amen! Sing it brother! I hope VG is reading this.nofreelunches wrote:I wish Vanguard had a (developed world) global bond fund. Many of those funds are up 10%+ YTD, and nicely offset the whole inflation/currency/ debasement issue. They pay 5-7%, but the fees are too high from other vendors, and I think Vanguard could easily beat the fees. Yes, they are foreign, but if done right, they are relatively safe. (I am not too worried about Norway or New Zealand Government bonds having trouble.) Besides, some countries believing in protecting their currency and tough out the downturns, which helps the savers.
I have GIM. It has been good to me. I'd rather have a VG fund though. I cannot see having all investments be dollar-based (undiversified), whether we are in good times or bad in the US. The past couple years are proof enough to me.
cheers
grok
One way it can work is that some institution (investment bank, hedge fund, etc.) borrows money to buy long-term tax exempt bonds. They then issue short term notes, which they sell to tax-exempt MM funds, for example. The institution then pockets the difference between the short-term and long-term rates, less expenses and the cost of borrowing. So essentially, the institution is a pass-through for the tax benefits.psteinx wrote:But how many institutional entities are holding munis? I would think that, because they're tax advantaged, munis primarily reside in the accounts of individuals, either directly or indirectly (i.e. through funds).
But if the rating of the bonds drops from AAA to AA, or there's even the suspicion that it might, depending on the terms of the line of credit and the mood of the lender who is ultimately putting up the money, they could get a margin call. In which case the MM fund gets no return, the institution takes a huge loss, and a whole bunch of bonds need to be liquidated into an illiquid market all at once.
edit: This link gives a more complete explanation than the one above.
Best wishes,
Brad
Last edited by baw703916 on Fri Feb 29, 2008 1:20 pm, edited 1 time in total.
Most of my posts assume no behavioral errors.
Bob,bob u. wrote:Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/news?pid= ... refer=home
Bob U.
Very useful. Thanks. I will have to read Bloomberg more often.
- Paladin
- indexfundfan
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- Joined: Tue Feb 20, 2007 10:21 am
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This too shall pass. Amidst the current gloom in the muni bond market, I want to post an article from last August:
http://www.reuters.com/article/reutersE ... 0920070830
http://www.reuters.com/article/reutersE ... 0920070830
NEW YORK (Reuters) - Tax-free bond prices are rebounding strongly as big players snatch up some of the most beaten down bonds, sparking hopes that liquidity is back -- at least for now.
Buyers on Wednesday were even spotted for high-yield municipal bonds, spurring hopes that funds that specialize in this sector might finally see fewer investor yanking out as much cash as they have in the last seven weeks.
The list of returning buyers included nontraditional players -- tender option bond programs run by dealers and hedge funds, whose selling had hurt prices, especially two weeks ago.
"Where arbs were nowhere to be found last week, they're certainly out there this week buying bonds," said George Strickland, managing director, Thornburg Investment Management in Santa Fe, New Mexico.
My signature has been deleted.
Always good to hear your perspective Valuethinker.Valuethinker wrote:1. collapse of the auction rate securities market - municipalities can't borrow.bob u. wrote:Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/news?pid= ... refer=home
Bob U.
2. I think a California municipality just defaulted?
3. most munis are extremely illiquid: a small change in sentiment can cause a big change in price. Those market makers holding munis won't want to get caught, so they will aggressively price down their inventories.
4. recurrent chaos re municipal bond insurers, causing investors to worry about getting repaid.
It's probably a buying opportunity, in the sense that the historic default rates for munis are much better (10X ?) than corporates of the same investment grade.
However, always, there is the problem of risk spread. If a state's whole economy is impacted, it may make that state's default rate higher than historic average.
Vallejo has not defaulted. It was close.
Also with all due respect to Vallejo but it is a small town. This is not Orange County. It was a $9M deficit after all.Labor leaders said they reached a tentative deal with city officials Thursday that should allow the city to avoid filing for bankruptcy.
Vallejo's city council had been scheduled to vote Thursday night on whether to file for bankrupcty because of a projected $9 million deficit.
But hours of negotiations Thursday between the city and the police and firefighters unions produced a tentative deal to cut costs from labor contracts.
"Bankruptcy will always be on the table if you can't pay your bills," said Vallejo Mayor Osby Davis. "What I'm saying to you is that we have a tenative decision, a tentative agreement right now. We expect and hope that the council will pass it."
- Paladin
Last edited by Paladin on Fri Feb 29, 2008 12:50 pm, edited 1 time in total.
Very helpful. Thanks. I will call Vanguard about CA IT TE to ask the same questions.learning wrote:According to Vanguard, the Intermediate Tax-Exempt fund does not hold auction rate securities, or floating notes, or whatever new acronym will surface next week in the Wall Street Journal.
They told me they hold only plain vanilla municipal bonds, and that Vanguard does its own credit analysis -- and chooses not to rely on rating agencies like S&P, etc. to assess credit worthiness.
I asked Vanguard last night if there were any holdings in the Intermediate Tax-Exempt fund which would be permanently impaired. (that is, would not recover once the market recovered.) They said there was not -- there had been no defaults, and they were not expecting any.
We're sitting tight and waiting for the storm to pass.
- Paladin
I think you are correct. In which case selling Vanguard TE funds might be the right move before the selling cycle gets worse. At least one gets to TLH.astroturf wrote:This is what I gather from that particular article:bob u. wrote:Here's the take at Bloomberg this morning. I'm in no position to assess the merits of the article. http://www.bloomberg.com/apps/news?pid= ... refer=home
Bob U.
1. Auction-rate securities market is broken (not really frozen) because dealer/brokers are no longer offering a backstop for liquidity.
2. Municipals that are using that market to pay short-term rates for long-term borrowing are getting trapped with high rates because of the failed auctions.
3. Municipals therefore need to refinance, re-issue debt via conventional long-term securities and abandon that auction market.
4. The plans for municipals to do this are moving forward, though it's not a fast process.
5. Some holders (banks, funds, hedge funds, etc.) of municipals expect a glut of supply (and it might be already there) which would drive yields higher. Therefore they decide to sell now since the market is not very liquid and it can get worse. The selling vicious cycle must be in place as the collapsing prices show.
- Paladin
- indexfundfan
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Because muni's are substitutes (though not perfect) for taxable bonds, there is definitely a price floor at which investors would decide that muni's are a much better deal than the taxable counterparts. This is especially so if there is another rate cut or if there is a political climate change that makes higher tax rates eminent.
At of now, muni's are already yielding more than treasuries of the same duration in nominal terms. In fact for my long term holdings, I am tempted to add them.
At of now, muni's are already yielding more than treasuries of the same duration in nominal terms. In fact for my long term holdings, I am tempted to add them.
My signature has been deleted.
FWIW, I've opened a separate thread with some practical questions regarding buying specific state bonds, here:
http://www.diehards.org/forum/viewtopic ... 429#164429
It may be of interest to some folks.
http://www.diehards.org/forum/viewtopic ... 429#164429
It may be of interest to some folks.