time to buy municipal bonds?

**Aleta** · 03-10-2008, 11:56 AM

I don't know anything about municipal bonds but I would think that they are more long term than your time frame. Just remember don't invest in what you don't understand.

There are many on this forum that I'm sure will be able to give you more advice.

**Merch** · 03-10-2008, 12:31 PM

Really? good time to invest in Munis? Iw on't invest in munis until the insurance business (AMBAC, MBIA, etc) settles out. Warren Buffet was going to enter the insurance of muni bonds (reinsure about 800 million). But I think he has scaled it back since then.

If the credit agencies continue to lower the ratings of these insurance companies, the muni bonds will continue to degrade until the rating equals the state or municipality. Now, muni bonds are far less liquid then stocks and such. There are about 1.4 million issuances and only about 100,000 are considered liquid. Lehman muni index is about 42,000.

I would wait until this resolves before going into the market. Never try to stop a bullet or catch a falling knife.

Just my 2 cents.

**jIM_Ohio** · 03-10-2008, 01:48 PM

I think anyone in 25% tax bracket or lower will make out better with money markets or taxable bonds. If you are in 15% tax bracket this comment applies to you even moreso.

If in 33 or 35% tax brackets, munis should be considered.

Use the math to figure out which makes sense (compare yields):

taxable bonds
(1-tax bracket)*yield=after tax yield

muni bonds
before tax yield=after tax yield

15% bracket, 5% taxable yield is
1-.15*5=4.25% yield

So muni yield would need to be higher than 4.25% for a person to get a better turn in 15% tax bracket.

33% bracket, 5% yield, taxable yield is
1-.33*5=3.35% yield.

So muni would need to be higher than 3.35% for a person to get a better return in 33% tax bracket.

The goal should be highest after tax returns, not the lowest tax bill.

That being said, muni bond income is one of the triggers for AMT, which can remove other deductions and make person pay a 26% tax across the board. Be careful of this.

**humandraydel** · 03-10-2008, 02:02 PM

Originally posted by Merch View Post

If the credit agencies continue to lower the ratings of these insurance companies, the muni bonds will continue to degrade until the rating equals the state or municipality.

This is the rub. Muni bonds RARELY default because it means the city, county, etc. wouldn't be able to borrow again - and they NEED to borrow to fund projects. I would argue that the municipality is safer than the insurance companies themselves - and apparently others feel this way as well as the state of California has decided to stop insuring their bonds.

I think this is a great time to buy munis - it is a rare occasion that tax free bonds yield more than taxable bonds. I agree with a previous poster that 4-6 months MAY be a short time frame for investing in these munis though. If the US plunges deeper into a recession, there may be more fear of defaults in munis. Of course, this is why you buy a bond fund and not individual bonds.

**humandraydel** · 03-10-2008, 02:10 PM

Originally posted by jIM_Ohio View Post

I think anyone in 25% tax bracket or lower will make out better with money markets or taxable bonds. If you are in 15% tax bracket this comment applies to you even moreso.

This comment makes me think you are not aware of the current dislocations in the muni market. Right now intermediate treasuries yield 2.89% and intermediate tax exempt bonds yield 3.54%. Assuming 25% tax bracket, intermediate treasuries yield 2.17% and munis yield 4.72%. Current spreads between munis and treasuries are more than 2.5% on an after tax basis. This is nearly unprecedented.

**scfr** · 03-10-2008, 03:23 PM

Originally posted by feh View Post

Hi folks.

I know nothing about bond funds. I've invested almost exclusively in equities thus far in my life.

I've been watching some CNBC lately, and I've heard more than one talking head say that it's a great time to invest in municipal bonds.

Given that it appears the market is gonna be choppy and move sideways for the next few months, I'm wondering if some cash I've got sitting on the sideline should go into a bond fund. My time frame here is probably 4-6 months, assuming the markets start to recover in the 3rd quarter.

So, is this a bad or good idea? Anybody have comments on VFITX?

Thanks!

The fund you mentioned is not a Municipal Bond fund but a Treasury fund. Are you referring to bonds in general?

I'd strongly recommend reading up on bonds before taking the plunge. The web site investininbonds.com is one place to start.

**sweeps** · 03-10-2008, 04:38 PM

HD is right -- municipal bonds were the baby that was thrown out with the bath water. They're pretty safe and they've been oversold, so investing in a municipal bond fund right now for the capital gain might not be a bad idea.

However, if you're a young, long-term investor you should be in stocks. Now is the time to BUY while people are extremely pessimistic, almost panicking. These opportunities don't come around too often.

**jIM_Ohio** · 03-10-2008, 04:55 PM

Originally posted by humandraydel View Post

This comment makes me think you are not aware of the current dislocations in the muni market. Right now intermediate treasuries yield 2.89% and intermediate tax exempt bonds yield 3.54%. Assuming 25% tax bracket, intermediate treasuries yield 2.17% and munis yield 4.72%. Current spreads between munis and treasuries are more than 2.5% on an after tax basis. This is nearly unprecedented.

Depending on size of investment in munis, it may trigger AMT. Couple that with a longer term time horizon- can current trends continue- and I would still think my advice holds true for long term (if you are buying bond funds).

If you buy the individual bonds, different issue altogether.

**Merch** · 03-10-2008, 06:56 PM

Ok let's talk about 3 things in the muni market:

1) Auction Rate Securities
2) Hedge funds
3) Insurer of muni bonds
4) Muni probe

1) California and New York just announced that they are pulling our of the ARS market and moving there munis to fixed. Means a ton of supply coming on the market. They aren't the only ones running out of this $330 billion market and refinancing their debt in fixed muni bonds.

$17.5 billion fixed munis are being sold in the next 30 days. Not bad right? Well the 12 month average is $13.5 billion

It is very important your understand the auction market, because a ton of munis are moving out of this market

2) Citigroup was talking on the 7th about hedge funds shedding muni assets and institutions not providing support.

3) Don't be so quick to dismiss the insurance companies. They provide the stellar ratings of munis that are subpar. If they can't insure the bonds, the bonds will be rated at the underlying asset, id est the municipality. Means the yield will go up as the price falls.

4) Justice department just launched a probe in USB, JP Morgan and Bear Sterns about bid rigging. This is in the muni derivative space. In particular, interest rate swaps.

Truthfully, there are some good yields, but there is also a lot of risk at this moment. I would wait for some of the smoke to clear. My advice, don't try to catch a falling knife and right now cash is king.

**Merch** · 03-10-2008, 07:02 PM

Oh munis never default? Low risk but still a risk. Anyone remember Orange County defaulting in 1994?

March 3 (Bloomberg) -- Jefferson County, Alabama, had $3.2 billion of bonds slashed to below investment grade by Standard & Poor's, putting it at the center of turmoil in the U.S. municipal bond market that has driven up borrowing costs.

The downgrade, made after the markets closed on Feb. 29, came after the county, which includes the state's biggest city of Birmingham, said it may be unable to pay banks holding floating-rate debt for its sewer system or make payments on related interest-rate swaps. Jefferson County, with $193 million in sewer reserves, faces the prospect of having to pay more than $1 billion to banks to buy back debt and unwind the swaps.

``It's a very bad situation,'' said Robert Brooks, the SouthTrust Professor of Financial Management at the University of Alabama in Tuscaloosa.

....

efferson County has $847 million of variable-rate sewer debt insured by FGIC and XL Capital. The insurers' downgrades may cause Birmingham-based Regions Bank and Paris-based Societe Generale, who agreed at the time of the initial bond sale to repurchase unwanted county floating-rate debt, to terminate their agreements. That would force the county to buy back the bonds.

``It is unclear how the county would be able to meet this obligation,'' Moody's Investors Service said on Feb. 27, when it cut its rating on the debt to its lowest investment grade of Baa3. As of Jan. 31, the county's sewer fund had $193 million, Moody's said.

Options

Jefferson County may reach a forbearance agreement with banks while it restructures its debt to supplement or strip out the insurance.

The state may also provide a mechanism to assure investors that the county's debt will be repaid, said James Spiotto, a lawyer with Chapman and Cutler LLP in Chicago who specializes in municipal bankruptcy law.

It is unlikely that the county would seek bankruptcy protection, an avenue of last resort that has been taken by 554 municipal entities out of 55,000 since 1937, most famously by Orange County in 1994, he said.

**Slug** · 03-11-2008, 05:45 AM

Anyone use Ameritrade for Muni investing? I'd like to know your experience.

**scfr** · 03-11-2008, 08:04 AM

Originally posted by Slug View Post

Anyone use Ameritrade for Muni investing? I'd like to know your experience.

I looked in to buying individual munis awhile back (finally decided not to) and did quite a bit of research. I was going to go with Zions Bank ... Their prices seemed good, commissions low, web site fairly easy to navigate, and they offered a 30-day free trial.

time to buy municipal bonds?