Are Munis A Buy?
December 7th 2008 20:58
I've not been neglectful of The Market Bugle, I just haven't seen anything I thought I could add a lot to the narrative. However, I read today that Muni-bond funds face record losses. Some funds down more than 30%, opening door for bargain hunters by Sam Mamudi at MarketWatch
I got to wondering about yields on some of these muni bond funds if they are down that much, Here's what I found doing some quick research:
These first four funds are basically high yield funds with up to 80% in revenue bonds, meaning principal and interest are paid our of revenues of the facility built with the proceeds of the bond sale. Revenue bonds are riskier than general obligation or GO bonds.
Now look at the USAA funds and see what a difference in yields you get if you take greater risk by going longer in maturity. These funds also invest in bonds that are not subject to AMT.
The oldest of all muni bond funds is the T Rowe Price fund and it also never invests in issue subject to AMT.
One comment to the article about big losses is the old saw that your assets may be down 35%, but you don't really have a loss until you take it! In theory that's true, but you may be stuck with a 5% yield and now the fund is down so much it yields 8.27% to new buyers. However you can't get 8,27%. You are locked in.
I never cared much for muni funds. If I buy a straight bond for $5,000, I can choose my maturity. I will know that at maturity, I will get my principal back. Not so with a Muni fund.
A better way to avoid a lot of the risk is to ladder maturities. That means you buy some bonds with a maturity in the one to five year period, some in the ten-year period and if yields are mouth-watering good, you buy some 30 year bonds. That way, you all ways have some bonds maturing at par to either rollover or extend out longer. I remember the State of Oregon offering some 13.5% yielding bonds that were non-callable for a number of years even if yields fell dramatically, which they did.
There may be some excellent opportunities in munis right now because the spread between treasuries and munis is so wide. Just remember, many states and munipalities will be running big deficits. Bankruptcy is an option for some states.
I got to wondering about yields on some of these muni bond funds if they are down that much, Here's what I found doing some quick research:
Eaton Vance's High Yield Municipals ETHYX Yields 6.65% DOWN 34%
Oppenheimer Rochester National Muni Fund ORNAX Yields10.76% DOWN 43.2%
Oppenheimer California Municipal Fund OPCAX Yields 8.27% DOWN 36.2%
Nuveen High Yield Municipal Bond NHMAX Yields 7,58% DOWN 33.7%
Oppenheimer Rochester National Muni Fund ORNAX Yields10.76% DOWN 43.2%
Oppenheimer California Municipal Fund OPCAX Yields 8.27% DOWN 36.2%
Nuveen High Yield Municipal Bond NHMAX Yields 7,58% DOWN 33.7%
These first four funds are basically high yield funds with up to 80% in revenue bonds, meaning principal and interest are paid our of revenues of the facility built with the proceeds of the bond sale. Revenue bonds are riskier than general obligation or GO bonds.
USAA Tax Exempt Short-Term Bond Fund USSTX Yields 4.31%
USAA Tax Exempt Intermediate-Term Bond Fund USATX Yields 4.97%
USAA Tax Exempt Long-Term Bond Fund USTEX Yields 5.66%
USAA Tax Exempt Intermediate-Term Bond Fund USATX Yields 4.97%
USAA Tax Exempt Long-Term Bond Fund USTEX Yields 5.66%
Now look at the USAA funds and see what a difference in yields you get if you take greater risk by going longer in maturity. These funds also invest in bonds that are not subject to AMT.
T. Rowe Price Tax-Free Income Fund PRTAX Yields 4.93%
The oldest of all muni bond funds is the T Rowe Price fund and it also never invests in issue subject to AMT.
One comment to the article about big losses is the old saw that your assets may be down 35%, but you don't really have a loss until you take it! In theory that's true, but you may be stuck with a 5% yield and now the fund is down so much it yields 8.27% to new buyers. However you can't get 8,27%. You are locked in.
I never cared much for muni funds. If I buy a straight bond for $5,000, I can choose my maturity. I will know that at maturity, I will get my principal back. Not so with a Muni fund.
A better way to avoid a lot of the risk is to ladder maturities. That means you buy some bonds with a maturity in the one to five year period, some in the ten-year period and if yields are mouth-watering good, you buy some 30 year bonds. That way, you all ways have some bonds maturing at par to either rollover or extend out longer. I remember the State of Oregon offering some 13.5% yielding bonds that were non-callable for a number of years even if yields fell dramatically, which they did.
There may be some excellent opportunities in munis right now because the spread between treasuries and munis is so wide. Just remember, many states and munipalities will be running big deficits. Bankruptcy is an option for some states.
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