Consider Municipal Bond Funds for Your Fixed Income and Cash Investments

September 9, 2008 by  
Filed under Investing, Retirement Planning

Warning:  Municipal bonds can be boring. But, if you are looking to squeeze a little more yield out of your fixed income and cash-equivalent investments, keep reading.  But while you are reading, be sure you monitor all of the developments in the market that have occurred in 2008 and 2009.

Freddie Mac and Fannie Mae Keep Us Thinking Ahead

I don’t like what the government has done to the poor shareholders at Freddie Mac and Fannie Mae.  The shareholders were not the people who borrowed money that they couldn’t afford to pay back nor were they involved in the decisions to loan money to unqualified buyers.  The shareholders (including preferred shareholders) are getting the shaft.   But the hard truth is that the move was probably necessary as a long term economic strategy.  It’s time to move on and react in a way that favors your own investment outlook.

Yesterday’s announcement caused smart investors to re-think their asset allocations, particularly as to investments that are sensitive to interest rate and credit risks.  With interest rates remaining depressed by Fed action, finding reasonably safe places to invest your cash and receive decent yields is a difficult task.

Yesterday I talked about high interest rate (5%) online checking accounts offered by some community brick and mortar banks.  Some Internet savings bank loyalists questioned my sanity on those thoughts but that’s OK, they can keep their 3% pre-tax yield at ING Direct and its competitors.

Municipal Bond Funds Give You the Tax-Free Edge

Today Mr. ToughMoneyLove wants to mention municipal bond funds, which have been disfavored in recent years because their yields, although tax free, have not compared favorably with other low-risk, fixed income and cash-equivalent investments, including money market funds, CD’s and Treasury funds.  The pendulum seems to have swung a little and it may be time to reconsider municipal bond funds in the fixed income and cash portions of your taxable accounts.

Let’s compare trailing yields on two name brand, low cost funds:  Vanguard Long-Term Tax Exempt (VWLTX) and Vanguard Long Term U.S. Treasury (VUSTX).  VWLTX has a current tax-free dividend yield of 4.62% and an expense ratio of 0.15%. For someone in the 28% tax bracket, that’s an equivalent yield (compared to a taxable bond or fund) of 6.42%.  VUSTX by comparison has a current dividend yield of 4.56% and an expense ratio of 0.26%.  Both funds require a $3,000 minimum investment.  VUSTX is even beating the tax equivalent dividend yield (5.15%) of one of my favorite inflation protected security funds, VIPSX.

Granted that Treasury funds are no-risk investments but the municipal bond fund is close.  Considering that the average default rate of high quality municipal bonds is only 0.01%, the risks are negligible and well worth the 1.8% effective interest rate premium.  (Earning an additional 1.8% is nothing to sneeze at in today’s economy.)  I have listed several other similar tax free muni funds below.

Fund Trailing
Yield (%)
Expense
Ratio (%)
Minimum
Investment
Fidelity Municipal Income (FHIGX) 4.15 0.44 $10,000
Fidelity Tax-Free Bond (FTABX) 4.06 0.18 $25,000
Franklin Federal Tax-Free Income A (FKTIX) 4.52 0.60 $1,000

You Can Also Avoid State and Local Income Taxes

If you are in a state with high state and local income tax rates (sorry New Yorkers and Californians), you may want to look for a municipal bond fund that owns bonds issued only in your state, which would be exempt from state and local taxes as well.

If you have the cash to invest in larger lump sums (not me), you can buy individual municipal bonds.  A good resource for finding and pricing municipal bonds is on EMMA, a market site published by the Municipal Securities Rulemaking Board.  (EMMA also features information about 529 College Savings Plans.)

Watch Out for the Alternative Minimum Tax

If you decide to buy an individual bond, I suggest that you look for a high-yield housing bond. These bonds were given special favorable treatment in the recently passed Economic and Housing Recovery Act of 2008, meaning that the Alternative Minimum Tax (AMT) will not apply to their interest payments.  (There are lots of these “tax tweaks” in this 700 page law, most of which are not favorable to folks with money.  This tweak is OK.)

Another option if you are concerned about the AMT is to buy a muni fund that owns only non-AMT bonds.  T. Rowe Price Tax-Free Income Fund (PRTAX) is one example of such a fund.  It yields 4.54%, has an expense ratio of 0.52%, with a minimum investment of $2,500.

Most of these funds have three-year and five-year average annual returns (in addition to dividend yields) in the range of 3-5%.  Obviously, if interest rates increase, the market value of these bonds and funds will fall.  At that time, you can sell and move into something else or you continue to hold them and collect the high dividend yield on your investment.

The Hard Truth Bottom Line

For best yields on fixed-income and cash equivalent investments in today’s market, you need to think and look beyond your comfort zone of money market funds, CD’s, and Internet bank savings accounts.  If you are in a higher tax bracket, municipal bond funds should be on your list of options to consider.  Make sure you factor in transaction costs when evaluating this strategy.  Also, keep a close eye on what the Fed does because when they start ratcheting interest rates up, you will need to make a move in another direction.

Anyone have other suggestions for higher yielding cash equivalent investments?

Update 2009: Muni bonds have not performed well in 2008-2009 and carry increased risk. There are some municipal bond funds that have lower risk than others.


Feed Mr. ToughMoneyLove

FREE UPDATES: If you enjoyed this, please subscribe to receive the newest hard truth from Mr. ToughMoneyLove automatically by RSS feed (what is RSS?) or by spam-free Email.

Share
  • Banner

Comments

58 Responses to “Consider Municipal Bond Funds for Your Fixed Income and Cash Investments”
  1. Take a look into the corporate bond ETF arena… it’s pretty new stuff and I don’t adequately understand it (yet), but the yields are impressive.

    Finding a 5-6% yield w/ the liquidity of an ETF is pretty decent.

    Ticker: LQD

  2. MasterPo says:

    What do you think of muni/tax-exempt money market funds? At 28% bracket do you think the 1% or so yield is with it?

  3. gideon says:

    I think you have horribly underestimated the situation. Many,many municipalities will go bankrupt due to the freeze in credit markets and other economic factors, and when most of your money is flat out lost, you will not think the yield of 6% wass much to brag about. In truth, treasureis are not reliable even themselves, soon enough. The world has never seen a situation like this. If you want to make it trough, I think precious metals are the only way to go.

  4. Gideon: You may be right, considering what has transpired in the 30 days since I wrote that. Certainly if you invest in munis, it better be in a broad based fund that spreads and dilutes the risk of a default. I also agree that this situation is unique although the cooperation among nations is likely to soften the blow compared to what happened in 1929. As for precious metals, they can go down faster than they go up and are a pure fear play. I’m not going there.

  5. gideon says:

    thanks for your reply. I don’t think precious metals are a pure fear play though. they are a great hedge against inflation, and with the tremendous new debt we are not burdened with in the USA, they should go up tremendously. Also, the price of paper precious metals on the exchanges os grossly out of whack relatve to physical metal prices, and at some point the paper price will have to go up markedly to better reflect reality.

  6. Jean says:

    Hi.

    Just hit upon your website this evening.
    Thought you might have some insight.
    I’ve gotten some great deals on muni bonds recently, as they have raised rates to encourage investors. Money is tight. I think I understand that aspect of it. I assume all the risk, but I’ve also gotten some good rates.

    My muni bond fund, however, has in the past 6 months actually lost money, and recently with the events of October, has gone down even more. I am trying to understand this in detail. I assume it’s because people are taking their money out of the fund, so that the value of everyone’s shares is decreasing. I’m wondering if they are doing this because they need the money to live, or because they are fearful for their investment?

    Another question I have is how the Fed’s move to shore up banks and improve liquidity will affect muni bond funds and muni rates in general.

    Should I hold the fund or exit before my loss becomes much greater?

    Thanks,

    Jean

  7. Jean – Thanks for visiting and your question. I feel bad that just a week after I posted this, the crisis in the credit markets hit fever pitch, causing a sharp decline in the NAV return of muni funds, particulary those that held long bonds or California bonds. I don’t know what fund you are in but if it is heavily exposed to longer bonds and/or California bonds, it will be devalued. In my opinion the loss in NAV occurred after it became apparent that state and local governments would have difficulty with future normal borrowing activities along with every other large credit user. This, in the minds of investors, made it more likely that there would be a higher rate of bond default and they started selling. It didn’t help that the governor of California wrote a very public letter on this very topic. On the other hand, the dividend yields are still very good (3-5% tax free) so unless you have a need for the money now, I would consider holding for the dividend yield. When the credit markets improve from recent rescue measures or if the Fed opens its discount window to state and local government borrowing, I would expect to see a positive change in NAV performance of broad based muni funds. (Anything weighted heavily to California bonds could be an exception.) If state and local governments have trouble getting credit from conventional sources then new bond rates will have to go up to reflect the increased risk. However, if your muni fund showed a steady NAV decline in the six months before 9/15, something else is wrong and it may be time to dump it. What fund do you hold?

  8. Shwony says:

    I read your answer to Jean and am in the same situation she’s in. I have Oppenheimer AMT-Free Municipal Funds and they have declined badly. The yields are great and the fund is well-diversified, but I am worried about the bad reputation this fund has developed. I’ve had this fund for nearly 10 years (it was an inheritance) and this is the first time it’s been in trouble.

  9. Shwony: The OPTAX fund you are in is a terrible performer (since early 2007) and is poorly rated by Morningstar. It grossly underperforms other funds in its sector. Because it has a front-end load and high expenses, I don’t expect it will recover any time soon. If you are not satisfied with the yield I would consider getting out of it now.

  10. steve says:

    How do you feel about Vangauard Massachusetts Muni bond funds Vmatx and VWSUX ? up untill a month ago they were performing very well.

    I have a fair amount of my retirement in there and I am getting concerned. They have declined about 30% in value so selling now would be painful but losing more would be worse.

    I don’t need the money now so if they came back to close to my initial investment in 3-5 years no big deal.

  11. Steve – Thanks for visiting. This is my take on the muni bond fund situation: Everyone of these funds took a dive beginning 9/15 which is when the worst economic bad news started going public. The reason they took a dive is that panicked sellers called their brokers or 401(k) managers and said “sell everything.” So muni bond funds were victims of panic selling just like a lot of other funds that still had good fundamentals. On top of that you had people like Gov. Schwarzenegger publicly warning the feds that states were in trouble because they could not borrow in the usual fashion. This caused some muni bond fund holders to worry about increased rate of defaults, so they sold on that basis. I think these funds will come back when the fear and panic subsides and your 3-5 year horizon is a good one. Actually, the muni bond funds should come back sooner than other sectors once folks realize that the the default fear is unfounded and that they can still get a very good tax free yield from them. I would keep a closer eye on your VMATX fund because that fund invests only in Massachusetts bonds, which makes it more volatile if Massachusetts starts having financial problems or even discusses the possibility of having problems. Your VWSUX fund is more diverse and therefore should be less volatile. Hope this helps.

  12. tigerlee says:

    I have just recently inherited some muni funds and am curious if you have any insight for me about them. I am completely naive about them, and the stock market too. As a newbie to all of this I am finding the learning curve to be quite steep. Any advice is appreciated. Immensely. These are the funds and approx. amount of shares I’ve received:
    FKTFX/4,000; ANWPX/800; PCTEX/2500. I am considering selling all shares in ANWPX as it looks like a poor performer?

  13. Tigerlee – Thanks for visiting. Let me take a look at your funds and respond a little later.

  14. Jean says:

    Hi again,

    I notice that you mentioned high-yield housing bonds above. They’ve been selling recently like hotcakes in many states. What is concerning me is the sheer volume of them being transacted and the fact that some extend out into the 2030s and beyond. It seems a bit risky to me that any state can feel confident enough about repayment of that many and with such good rates for so long. Are they risky? As chance would have it, I have some myself, but none extending beyond 2023. Is there some small print somewhere that allows them to be callable? They’re certainly not GO, and many of them say “REV”. How can Hsg. and Comm. Serv. generate revenue? The tomes of paper that arrive regarding my current investments are impossible to wade through, and I’m not finding the specific information I seek. Pages of tabled figures, don’t reassure me. It seems that I may be missing something obvious to better educated individuals, like yourself.

    Thanks,

    Jean

  15. tigerlee – I’ve looked at the 3 funds you mentioned. First, ANWPX is a managed equity fund, not a muni fund. FKTFX and PCTEX are both muni funds that invest exclusively in Calif muni bonds. That is an advantage if you pay Calif state income taxes because most of the income from these funds will be exempt from Calif income tax. Otherwise, I would prefer more diversity in the bonds. Calif bonds are probably at somewhat higher risk right now. These funds have a nice yield however. Keep in mind that hedge funds etc. have been selling a lot of their muni bond holdings in recent weeks to raise cash. This has helped to drive prices down. Your decision on whether to sell any of these funds must take into account your overall asset allocation, your tax situation, your basis in the funds, and whether you need the income from the funds either now or in the future. If you will show a gain in selling them, this year may be a better year to take that gain because capital gains tax rates may be going up next year.

  16. Jean: Every muni bond has its own terms as to when and if they are callable etc. I agree that it can be complex which is I prefer muni funds over individual bonds. I would not be too concerned about default if the government that issued the bonds has the right to use general tax revenues to repay them. It sounds like some of your bonds do not fall into that category. In that case, you will just have to investigate the financial health of the government and project associated with the bond, then assess that risk against the income you expect to receive. Would it be your plan to keep the bonds until maturity

  17. Jean says:

    Yes, I never do other than hold things to maturity. I guess I’ll have to spend the time necessary to completely understand the nature of all the bonds I hold; and figure out how to sell those that I’m not comfortable with. Some of my bonds have insurance, but due to recent events the quality of insurance itself has come into question. And the rating system for bonds may or may not be reliable either. I agree, those that are paid for through general tax revenue would be the safest, but not necessarily the best interest rates. What a mess.

    My muni fund, as mentioned above, has tanked to such an extent, that I don’t trust it any more than the stock market.

    Thanks for your help.

    Jean

  18. john n says:

    Hello Sir
    Really enjoy your website. Would you kindly comment on rate of defaults with municipal bonds over long term, is it ~4% [especially with the high grade bonds A- and above]
    thanks

  19. John: According to data I have read in reliable sources, since 1986, only 34 municipal bonds issued by more than 10,000 governmental bodies rated by S&P have defaulted. This is much lower than your 4% number and is negligible. Thanks for visiting.

  20. Anthony Onofreo says:

    Hi,

    I, too, inherited shares of a municipal bond fund that has performed badly, especially after September. It is an Eaton Vance fund, symbol EANAX. It is not highly rated by Morningstar. Would it be wise to sell it and buy another, such as VWLTX, or just hang on? Thank you.

  21. Anthony: Thanks for your visit and comment. Let me take a look at that fund and comment later.

  22. john says:

    Dear Sir;

    Thanks again for this wonderful website and your kind response. Would you comment on this “coporate bond”, I think it belongs in this class – FIFTH THIRD CAP TR FTB-C http://finance.google.com/finance?q=NYSE:FTB-C
    price 15.75 currently, yield 8.88%, call 2014 @ 25 dollars but mature 2068 [could be yielding ~16% if call around 2014 if it’s call], moody rated A-…. I was thinking of buying a small portion. I’ve tried to research on Fifth third bank, it does not seem to be bankrupt, but these days we never know [look what happen to citi and maybe Wells Fargo/Bank of America – Word on the streets that these Giants may fail]. Should have bought it two days ago when it was ~ 12 dollars, yield of ~15% in two days

    Happy holiday
    thanks – johnN

  23. I think you’re going to need a FP certification at this rate Mr. TML… said jokingly of course.

    Muni’s are continuing to getting popular as time goes.

  24. Anthony: That Eaton fund invests in long bonds, meaning that you are buying more interest rate risk. I would avoid such a fund right now. Its expense ratio of .63% is also higher than it needs to be. The experts I have read are recommending an intermediate term muni fund and I agree with them. One example is VWITX which has an expense ratio of only .15%, is yielding 4.2% and is down only .3% in the past year. That is very good compared to other similar funds.

    John: I do not invest in individual bonds because I do not have enough money in that sector to adequately spread the risk. My preference would be for a fund that holds short to medium term bonds. I have not investigated Fifth Third but I would be wary of buying a bond issued by any financial institution right now, unless the Treasury is guaranteeing it. I understand that Goldman just issued some new paper that is guaranteed by the Treasury and is yielding more than Treasury paper by 2%

    Matt – You could help me out with some advice here!

    John

  25. Randy says:

    Hi…does anyone know of any muni bond funds that invests in AAA bonds only, as my feeling is that investing only in the highest quality bonds is a pretty safe investment. Thanks!

  26. Boss says:

    Mr TML, Just discovered your great website this AM. After finishing “The World Is Curved” I do need some counsel. My question relates to CA Muni Bonds and specifically Vanguard, CALTTE (vclax) and CAITTE (vcadx). I have watched both these funds lose approx. $1 in value and am beginning to wonder if I should dump them to cut my loses. I’m 75 and retired, do not need the interest but mainly concerned with security and preserving principal. Would greatly appreciate your thoughts on both funds. Many thanks. Boss

  27. Randy: I do not know of any funds that invest exclusively in AAA grade bonds. I follow primarily Vanguard funds. In today’s economy, I suspect that it would difficult to create such a fund and insure that AAA bonds going into the fund would remain AAA over the life of the bonds.

  28. Boss: Thanks for visiting. If you do not need income from the bonds but are more interested in capital appreciation, I wonder whether you need to own a muni bond fund at all. I would not want to own muni funds with a California emphasis because California is in financial trouble, making their bonds more risky and less popular. VCLAX is a long term bond fund which also adds more interest rate risk than I would want. VCADX is an intermediate term fund which is better. Since these are admiral share funds, I assume that you have a substantial position. If I were you, I would get some year end tax advice and see if it makes sense to sell the muni funds you own to harvest some tax losses and move into something that better meets your goal of security and principal preservation. Do you have any TIPS or TIPS funds in your portfolio? They don’t have the yields of muni’s but they do give you inflation protection. I own VIPSX for example.

  29. @ Boss and Mr. TML

    Hope I’m not stepping on toes here Mr. TML, but just wanted to add one quick suggestion to Boss.

    Have you considered calling Vanguard directly and speaking to their financial advisors?

    Since you’re in the Admiral share class, you will likely get “preferred status” to ask such questions. Simply ask one of their fixed income advisors what they feel you should do taking your age, investment horizon (at this point it’s protection, not growth), and the crazy market swings into consideration.

    I like munis as a play on higher taxation rates, but with this volatility and forced liquidation, I’m not sure munis are the safest place for income protection at this time. Hope that helps.

  30. Matt: That’s a good suggestion for Boss. Depending on what else Boss has in her portfolio and her tax situation, making a move to a new fund this year may make sense because cap gains rates are likely going up next year, at least for some people. Vanguard should be helpful on recommending funds but probably will not be handing out much tax advice.

  31. Andy says:

    Hello Mr. TML – Do you have any insights on a closed end CA muni fund with symbol PZC? Share price has dropped from $14 in Jan to less than $6 today, and dividend has been “postponed”. Yikes! I own a rather substantial amount and wonder whether to hang on or sell. Thanks!

  32. Andy: Pimco is having problems with a number of its funds falling below the minimum valuation ratios, meaning that they are legally barred from paying dividends. That’s what happened with PZC. It is uncertain when the funds will recover sufficiently to allow dividend payments. This fund is also focused on California muni bonds. With Calif in such bad fiscal shape, investors are selling off because of higher default risk. If I owned PZC I would sell it. However, your situation might be different so you need to do what is best for you.

  33. Seneca says:

    Mr. TML – Count me among the muni bond fund investors who faces a steep loss. I made a foolish error when I let my (former) investment advisor put me in ONJCX Oppenheimer NJ Municipal C. I walked in wanting to safely put some down payment money into a short term (6-month to 12-month) CD and was talked into the NJ muni fund since I would not have to pay tax on the income. This was just over a year ago and now my investment is down over 40%.

    I am angry with myself for not just going with the taxed CD where at least I would have gotten my money back with a bit of interest.

    I think this fund has a few things going against it, namely it mainly invests in NJ bonds (though not exclusively) and it is focused on more high yield long term positions. It just keeps going down and in the last 90 days of course, it fell off a cliff.

    Fortunately, I have other money I can use for a down payment so I don’t have to touch this. My question is, do I sell at a huge loss now (I already have enough other losses to max out on the capital loss allowance with the IRS) and try to reinvest what is left elsewhere, or, is there a chance I can at least be made whole on this thing in the next 5 years or less? NJ is one of the states that is facing mass resident exodus right now and so the ability to pay down its debt is questionable. I would like to think NJ is “too big to fail” but I have already been burned with my Lehman stock thinking that it was going to be saved by the Feds. No such luck.

    It seems there are no rules anymore so I am just looking for a viewpoint from someone with muni expertise. Any advice is appreciated.

  34. Suresh says:

    EANAX (Eaton Vance Municipal Bond) has been on the decline for the past 3 months or so but more so in the last 20 days. I do not know what is going on.
    Can some expert on Muni help me understand ?
    The current yield is around 8% percent on Dividends.
    So, something does not smell right here.

    Thanks

    Suresh

  35. @ Suresh Most all muni funds are hurting because a lot of institutional investors (.e.g., hedge funds and the like) have had forced liquidations. EANAX has underperformed its index, most likely for two reasons: (1) it emphasizes long bonds and most bond investors are afraid of the interest rate risk and (2) it has a front-end load, which deters new investors. This is a managed fund and some of the holdings are obviously now considered high risk by the market. I don’t see any conditions under which this fund makes any big moves back up in the foreseeable future. There are analysist reports for this fund that you can purchase at Yahoo Finance if you want to learn what the pros think.

  36. Matt SF says:

    Seneca and Suresh,

    Right now, we are experiencing extreme volatility in nearly every segment of the market. Even the most boring investment vehicles in the world — US Treasuries — is going through a bubble of it’s own due to high demand, and astonishingly paying out a negative rate of return.

    So as you can imagine, there is substantial fear among large institutional investors and pension fund managers who formerly loved muni bonds as their safe haven investments that paid a 5-7% yield and maybe moved 2 points all year.

    Also, there are many states who are in need of federal assistance to just make payroll. California being the first among many who could potentially be in a serious crunch when it comes to meeting their debt obligations. This is why your muni funds have taken a nosedive.

    Hope that helps.

  37. @ Seneca ONJCX is another non-diversified muni fund which investors are not fond of for that reason. In addition, the fund is heavily invested in tobacco settlement bonds which I do not believe are backed by any other source of state revenue. Investors don’t like that either because there is a lot of risk. (Neither do I.) Finally, ONJCX has a high expense ratio. Basically, it does not have anything positive going for it compared to many alternative muni funds. Whether you should sell now is something you will have to decide for yourself, based on your risk tolerance, tax situation, etc. Unfortunately, I don’t see things getting a lot better right away in the muni fund sector. However, it is quite possible that muni funds will get a positive bump next year when tax rates for upper income taxpayers are likely to increase, causing those taxpayers to look for tax free investments.

    I’m shocked that your advisor put you in this fund for a short term investment.

  38. Seneca says:

    Thanks for the responses TML and Matt. The only thing more shocking than my advisor putting me into this fund as a short term place to park cash was that I allowed it to happen. I am usually so very careful with how I invest my money and I am baffled by my own decision.

    I am going to sit down this weekend and do a full assessment of capital gains for the year (I have been making some money at least by being short equities) and see how much I have in capital losses and if it makes sense, I may sell some or all of my position to offset any gains.

    I fear we are heading for a depression rather than just recession and it would not surprise me if the state of NJ has a hard time meeting payroll let alone paying off its debt. NEVER AGAIN will I place so much money in one investment vehicle without sleeping on it. I guess it could be worse, I could have invested it with Bernie Madoff.

  39. Shwony says:

    Just a few remarks/questions on the latest posts. On CNBC 12/12 one of the guest “experts” said there will be a mass exodus from Treasuries as investors will not remain satisfied with negative returns, or the other pittances these Treasuries are paying. Bloomberg.com seems to agree the flight will be “breathtaking.” CNBC expert sees a stampede into corporate and/or muni bonds, both of which are in the crapper now.

    My theory: Our new president promises aid to states/municipalities; he’s not going to let them go broke during his administration, so that should reassure muni investors. Also, the mass stimulus for infrastructure will include a Federal backstop for muni borrowing –See change.gov plans for economic recovery. So municipalities should be a lot more secure than under Bush, who has flatly refused to help them. Under Obama’s administration it seems munis will take off as investors who took a loss when they went into Treasuries and are continuing to take a loss seek to recover with bonds that are “on sale” and will double or triple their money as the NAVs go up –and think about all that tax-free interest . . . does this make sense, anybody?

  40. Jean says:

    Thank you Shwony.
    Yes, it makes perfect sense.

    I’ve been totally worried, and also seeking out information from every source I can find.
    I have an enormous number of munis that I hold outright at full risk.
    My broker tells me that our state is solvent.
    I, fortunately, don’t live in CA or NY or MI (with the auto industry) etc. etc. I’m in a relatively safe and uneventful state.
    I also have a large muni bond fund, which I had originally opened thinking that that money would remain more liquid and also be safer from the unlikely occurrence of a default of one of the bonds. This didn’t work out as I expected, and here we all are. But I’m holding it along with all my stocks, bonds, and associated funds. So far all my losses have been on paper only.

    I don’t have cable TV, so I didn’t hear the CNBC report to which you are referring, but all my research indicates the same. If Obama has a brain at all, he can save the country and taxpayers a lot of money by allowing us to invest in our own home states without fear of principal loss. Muni bond funds should also become attractive and respond accordingly. There’s a golden opportunity here for municipalities, states, taxpayers and citizens in general.

    If you can figure out a way to get a message to Obama – go for it.

  41. Shwony and Jean: What Shwony says makes sense. On the other hand, Obama and team are faced with having to save and rescue lots of people and institutions and they can’t do it all. If (like New Jersey for example) state issues bonds backed by tobacco settlement funds, do you really think Obama is going to spend any time or money worrying about that? He may be concerned about defaults on general revenue bonds but not much else. So it depends on what your muni fund owns. Also, if everyone thought that Obama would backstop munis with the U.S. Treasury, investors would be going to munis now. I am not seeing that. But, I hope you are right!

  42. Shwony says:

    Hi Mr. TML, thanks for responding to my comment! However, I must clarify this: No, PE Obama is not expected to back previous muni debts, tobacco or otherwise. What he plans to do is create a backstop for future borrowings, maybe a combination of federal aid plus bonds, as one governor said “we will do some of the financing ourselves.” Also a tax break for banks that purchase new bond issues. So this should gain investor confidence in the muni market. Do check out change.gov — its a great source for everything Obama is working on and goes into detail about State/municipal aid.

  43. Shwony – If Obama creates a backstop for future state and local borrowings, then Vanguard and others will need to create a new mutual fund class of only “backstopped” munis. Then I might be interested. I wonder how much due diligence will be performed on bond issues before the fed government takes on the risk?

  44. Seneca says:

    Wouldn’t such a backstop just cause existing muni’s and muni funds to tank even further?

  45. Jean says:

    I see your point.
    I wish you hadn’t brought it to my attention, though. Sleep is getting to be a pretty rare commodity around here.

  46. Barbara says:

    Dear Mr. TML,
    Thank you in advance for this website. I hold Oppenheimer AMT Free NY Municipal B (ONYBX)and my question is: should I sell the Munis or equities to offset a capital gain. I live in NY.
    Thanks, B

  47. Robert says:

    Dear Sir TML,

    I’m bleeding financially like many others because of a Eaton Vance Hawaii CL A (ETHWX)I invested in about 1 1/2 yrs ago. Your advise as to whether i should cut bait, like my wounds to the tune of 84k or wait out the scorched Earth correction the economy is currently going through?

    Thank you for sny information you or anyone else cares to share.

    Robert

  48. Seneca says:

    Anyone else noticing a slight uptick in their muni funds for the first time in weeks?!?! Flight from Negative/No interest rate on treasuries? Mine is still a dog but I was shocked to see two days in a row where NAV went up a bit.

  49. Shwony says:

    Yep, muni funds finally went up a bit! According to the Municipal Market Advisor daily update there was positive activity in the High Grade sector of the muni market. Gain of 1.53% for the week. The Advisor lamented that the lower grades are still in the dumps however. If your muni fund includes high grades and the share prices went up on them, you see it in your NAV. You can get a free 2 week trial of the MMA by going to their website and signing up. You will get an e-mail on every day of trading with the latest market news.

  50. Robert says:

    No doubt, muni funds have risen in the last week, but i wish they would rise as fast as they fell over the last five months. But, I’m thankful that the loses have been at least for now…turning in a postive direction.

Speak Your Mind

Please leave a comment and tell us your version of the hard truth...

You must be logged in to post a comment.