Muni Bond (and Muni Bond Fund) Discussion

[njhowie]

Based on what I'm seeing as far as pricing weakness in the housing/mortgage munis, there seems to be an expectation that there will be a wave of redemptions coming. The munis, many recently issued, have call dates a fair ways off into the future. However, they may be looking to invoke their extraordinary redemption/prepayment clauses to redeem at will.

I just nibbled on a taxable Colorado AAA 2053 maturity, 2032 call, 6.25% coupon, recently issued in September. I paid 102.5. I figure the premium isn't much at this price. If they call in under 5 months I'll lose a few dollars. If not, looks like a great buy.

 

[imbatman]

I have been buying a number of those over the last 6-months but now a little soured on the premium pricing having had 2 HSG issues (both TE variety) extraordinarily redeemed in mere months after issue. The downside is if I were to stop looking at HSG issued munis, there is very small volume remaining at Fido.

 

[RobLJ]

I have started buying opportunistically on a couple of CEFs - NVG (non-taxable) and BBN (taxable). Both are up for me and paying monthly, but my thesis is the same as yours.....the discount on muni CEFs appears significantly higher than normal so as people (like us) start scavenging for alternatives, these should rise too.

Thinking along the same lines I bought 20k in SBI and MMD this week. I sold some PMO about 6 weeks ago just for the tax loss, but this increases my position in muni CEFs.

 

[imbatman]

Nice little write up about HSG municipal bonds in this weeks RJ newsletter

https://www.raymondjames.com/-/medi...ghts/bond-market-commentary/bond_investor.pdf

 

[imbatman]

You folks put much weight in bond insurance? Seems all I saw for the longest time was from "ASRD GUARTY MUN CORP" which would typically raise a bond's rating to A1/AA, but now I am seeing more from "BUILD AMERICA MUTUAL", which I assume people are selling because of some of the news that some issuers may try to claim events to allow them to redeem early?

https://www.natlawreview.com/articl...y-be-able-call-their-direct-pay-build-america

Honestly if the insurance was really very good, I am surprised the underlying ratings don't go higher - I mean, seems it would have to be an incredible situation for both an issuer and insurer to go insolvent.

 

[nelsonowe]

Thanks for an interesting article (not that I understood it all).
I don't put a lot of faith in the insurance. The way I understand it, insurance indicates an issuer that wasn't strong enough to go it alone. That said, if the relative yield is good enough, and the insurance gives some extra possible protection, I don't avoid it, either.

 

[imbatman]

Do we fully trust Fido's calculation of Yield to Worst (YTW - typically call) and Yield to Maturity (YTM)?

I was looking at a secondary 25-yr (effective) insured taxable muni (915455NB1) that has a 3.8% coupon and selling at $73.595....which they show as resulting in 5.8% YTW (I believe that) but ALSO being the same 5.8% YTM.

How is it possible that a lower coupon rated bond with a fixed sales price can have the same yield over both a 5-year period (call date or YTW) and 25-year period (maturity or YTM)? No math that I can comprehend.

 

[nelsonowe]

Yup. I have been confused about that, too. Fidelity actually doesn't give you the last calculation you need - yield to call (YTC).

In the case of 915455NB1, YTM and YTW are the same because maturity IS the worst case. Any earlier call will give a higher yield, and the sooner the call, the higher the yield. I graph it out using this page:

https://digital.fidelity.com/prgw/digital/priceyieldcalc/

Here is the calculation. If called in 2029, yield will be 10.22%. Between 2029 and maturity, the yield will (linearly, I think) fall back down to 5.8% at maturity.

 

[nelsonowe]

Much clearer at Schwab. See YTC.

 

[nelsonowe]

Here is the screen shot. I imagine it also means the bond is less likely to get called early?

 

[imbatman]

Thanks @nelsonowe I had no idea that tool existed. Yes, it would be nice to not have to try and figure out which event is included in their YTW. I also realized why my head wasn't comprehending the YTM properly....because I was still imagining lost coupon interest (due to lower rate) on a (for example) $10K investment as opposed to the actual discounted $7.5K investment. Definitely that was my concern was with a lower coupon, the likelihood of call falls and your chance of holding to maturity rises so the actual YTM becomes a much more important part of the investment decision.

Anyhow, much appreciated, learned something new which is great!

 

[imbatman]

You are correct, I do like that info page from Schwab much better, very informative and clear. Kind of curious what that "Current Yield" means but still great data points.

 

[nelsonowe]

Current yield is what you earn yearly from interest payments. In this case, it's 3.8% of par price ($3.80 per $100 bond) divided by purchase price ($73.5ish).

3.8/73.5 = 5.17%
Hope that helps!

 

[imbatman]

Yup makes total sense. Definitely adding this tool to my double check tool arsenal, thanks!

 

[Spock]

Fidelity's bond pages have some new/recent quirks... a couple of days ago it started with the YTW=YTM.... before that they were different values. So I'm assuming its a bug.
Not a recent problem on Fidelity bond yields are values for the extremely short maturities... the extra $1 per thousand commission dramatically changes the yield... IMHO the bond pages should show yields with the commission already factored in... says having to plug every bond into the yield calculator manually. And muni bonds should allow you to input your marginal tax rate to display/filter the tax equivalent yields.

 

[nelsonowe]

And so, it appears that they are using this date, when it is the maturity date, for the YTW when we see YTW=YTM yet YTW would be lower if called on the posted call date and not the maturity date. Fidelity is saying "We don't believe they will call"...

njhowie, can you give an example? I have never seen that happen....!

 

[njhowie]

njhowie, can you give an example? I have never seen that happen....!

I removed the post, because I didn't describe it well enough.

After reviewing further, I believe that YTW is only looking at the call date. If there is no optional call for the bond, then it is setting YTW = YTM always. This becomes incorrect if there are sinking fund redemptions and the price is above 100. Yield to sink will be lower than YTM, however the display shows YTW = YTM.

Here is an example of that. In the attachment, the top two yields of 6.002 and 6.002 are YTW and YTM. The 0.395 is yield to sink. Clearly in this case, YTW is not 6.002, because 0.395 is less.

Sorry for the original post that was off.

 

[nelsonowe]

I don't really understand how sinks work in real life. My little bit of research shows that they are bond-specific and can have a variety of implementations.

That said, njhowie is right about the yield-to-sink NOT being considered in YTW. Fidelity itself says so. I assume the mechanics of calculating each bond are too complicated (and rare), they they leave it to us to figure it out.

 

[imbatman]

How much do you guys trust when Fidelity does NOT mark a bond as having Extraordinary Redemption (ER)? I was looking at X82672168 today (which is NOT indicated as having ER or a Sinking Fund) but see the prospectus does say (on page 227 or D-1) that they are "subject to mandatory sinking fund redemptions, optional redemption, and special redemption.....before maturity, as provided in the Indentures"

Is this just standard verbiage and where would I read the "Indenture" if not here in the offering statement? I don't see the standard "special redemption" verbiage you often find in these but if one is going to pay over premium, you want to make sure it will last until call or you could lose money.

 

[Mr._Graybeard]

I wouldn't consider it standard verbiage, and I always read the offering statement before investing in a bond. Then I try to find any outside news reports about the debtor's financial condition ... although those are becoming more scarce with the decline of newspapers.
My approach is that bond sectors like single-family housing, student loans and hospitals are most prone to "extraordinary" recalls, which aren't really extraordinary, because individual debtors covered under the bond are likely to pay off their loans early, leading to partial redemptions. I have a couple of these right now, a hospital bond and a student loan bond that the borrower has been nibbling away at for years. The student loan bond started out at $50k and will be down to $5k after June 15. Its first listed call date is in 2026, maturity 2030. I doubt that any of it will remain when 2026 rolls around.
Of course I didn't pay a significant premium for the debt because I knew pieces of it would be called early. With a 3.5% coupon, I won't miss it in this market.

 

[jazz4cash]

I wouldn't consider it standard verbiage, and I always read the offering statement before investing in a bond.

I have had trouble finding statements for secondary market issues. Is there trick to finding these?

 

[Mr._Graybeard]

I have had trouble finding statements for secondary market issues. Is there trick to finding these?

On the fidelity platform, you click the "news and documents" tab after selecting the bond you're interested in. From there you'll see a link under a header labeled "primary market documents."

 

[nelsonowe]

Imbatman -
I took a look at those Maryland bonds (MONTGOMERY CNTY MD HSG OPPTYS COMMN REV 2023C). I think Fidelity is correct, and there is no special redemption. It looks like the bond funds some kind of headquarters building and is not for housing, so there is no need for the normal special early redemption provision that we see on most housing bonds. The yield (4% to yield-to-worst on 2043 bond if called in 2034) seems about right for the greater certainty of the cash flows (i.e. no special redemption until 2034 first call date).

The reference in D-1 to "special redemption" seems to be more boiler-plate by the lawyers, as there is actually no mention it the bond offering above. The "indenture" they mention is a the actual contract between trustee and issuer, and is something I have never actually seen. The prospectus should track everything in the indenture (and more). Interesting to try to figure all this out.

 

[imbatman]

Thanks @nelsonowe appreciate the second set of eyes. This one is gone now but great to learn for next time. I pretty much am only buying non-ER and longer dated at this point. Seems like airports have been showing up a lot the last few weeks in secondary market, but I have been happy to grab some A1/A2 5% coupons for about 4.6%ish......

 

[jazz4cash]

Ok, thanks Mr Graybeard. I actually mis-spoke. It is secondary corporate bond details that I don’t know how to find. I forgot which thread I was in even though I started it !