Build a bond book

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Oct 28, 2008 3:35 pm

I know most of you are fee guys or planners or both. But for those who want to build a fabulous business now is the best time in a decade to build a tax free bond book. Not a tax free fund book, a book built with positions in individual bonds.

 
Live well, help people achieve their income goals - just buy bonds
 
Buy bonds for income- not part of an asset allocation plan
 
Buy bonds for income-not to balance a portfolio to achieve a better risk profile.
 
Buy bonds for income- and keep buying no matter what is going on.
 
Mr. Smith, I've only got 300 of these NJ Turnpikes, lets go with these and I'll call you if I find more at this level fair enough?
 
It's that easy! And that hard.
 
But rewarding.
 
A year from now every person on this forum could have 10 to 20 million - new money put away in tax free bonds. How hard do you want to work?
 
Now is the time
 
Reinvent yourself!
 
That's what I did after a life changing event and an almost exit from the biz 17 years ago.
 
Just buy bonds!
Oct 28, 2008 3:52 pm

BondGuy,

I'm starting to see some worries at the fringes of municipal bonds.  Sure, WSJ and everyone else is calling them a screaming buy, but I'm hearing some of the bearish bears saying they're the scariest thing out there right now.  We haven't even seen the worst to come with muni defaults.  Granted, State water and GO bonds are usually sound, but most of the munis out there are revenue. 

Am I just getting sucked into the pessimism?

Oct 28, 2008 3:56 pm

Bondguy, maybe you need to talk some sense into me... but I've always stayed away from individual issues / securities because I'm afraid of blowing somebody up.  That being said, I've always used mutual funds.  Regarding munis, I figure shops like Franklin Templeton buys up all the good issues and leaves the crumbs.  Furthermore, portfolio managers are more qualified that I'll ever be.

Oct 28, 2008 5:45 pm
gvf:

BondGuy,

I'm starting to see some worries at the fringes of municipal bonds.  Sure, WSJ and everyone else is calling them a screaming buy, but I'm hearing some of the bearish bears saying they're the scariest thing out there right now.  We haven't even seen the worst to come with muni defaults.  Granted, State water and GO bonds are usually sound, but most of the munis out there are revenue. 

Am I just getting sucked into the pessimism?

 
 
I burned the roof of my mouth on a hot slice of pizza, so that pizza is bad stuff!
 
Yeah, you can always find a reason not to buy. A good example: The king of all revenue bonds: NJ Turnpike Bonds. According to the CNBC talking heads they are a dangerous investment because with a looming recession people will be driving less. OOOOOH stay away from those bonds!!!! Same goes for Port Auth paper, & TRi Borough Bridge and Tunnel. And what ever you do don't buy any of those airport bonds, not with people flying less. Oh, and I shouldn't leave out housing bonds. Don't you know there's a housing crisis in this country? Those things are toxic!!!!
 
Get the point. The uninformed and misinformed are all entitled to opinions. Unfortunately some of these people have an audience.
 
That's not to say you shouldn't be careful. Learn about the muni markets and make your own judgement.
 
And not to take a shot at you, your post is so misinformed that it neatly shows why a niche muni broker can be a real value added advisor to clients and build a nice biz in the process.
Oct 28, 2008 6:00 pm

BondGuy,

 
With all the uncertainty over bond insurers, do you limit yourself to buying only insured paper?  What about rating quality, do you give much creedance to that?
Oct 28, 2008 6:02 pm

No worries BondGuy, I use muni bond portfolios for a lot of my HNW clients, but by no means am I an expert at all; I'm just repeating (badly) some of the pessimism I've heard lately (from Ron Carson's VPM Manager, and see below)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atNCL4simnEM

And I'm not sure how reputable these are, a client forwarded them to me a few days ago:
Muni Bonds, Boom Bust Theory Part 1
Muni Bonds, Boom Bust Theory Part 2



Oct 28, 2008 9:56 pm

GVF, sorry no offence meant. Even in good times there are bonds that are in trouble. As Orange County California shows us, there is a powerful incentive to pay these bonds off. Even revenue bonds like airline bonds got paid off in spite of the airline bankruptcys. Still, stick to GOs. They are steal today.

 
Mike- Funds have their place. High Yield for example. Also for those wanting monthly income but don't have enough dough to make that work with individual bonds. And for those who aren't committing a major sum to munis.
That said, IMO there is no reason on the planet to pay someone a yearly fee to manage a portfolio of muni bonds. Build your own portfolio, one bond at a time if need be, custom tailored to the client's need. Then let the bonds sit and percolate, doing what they do. Charge the client 1 to 3% on the front end and let the bond go to maturiy or call. If there is a benefit, tax swap the bonds as the situation warrants. Bonds purchased and managed in this way will become the best investment deal these clients ever own.
FT is a very good shop, as is Oppco and a few others. Still, don't be afraid of individual issues. The muni market is a retail market and if you have access to a decent trading dept or trader at your firm they will find you good paper. Finding good paper is a non issue.
 
Snags - I don't see a reason to buy insured paper only. I'll buy it if the price is right. If the paper is insured I look at the underlying rating and that's what gets quoted to the client.
 
Most insured paper is trading at the underlying rating level these days. Well, insured and uninsured are trading at the same levels.
 
I give a lot of weight to ratings quality. I like A or better. I like big ticket revenue bonds like turnpikes, bridges and power companies. There is some paper i won't buy, like hospital bonds, unless i know the hospital. Yet, i'm a buyer all day long of non rated retirement communitys paper. Not a big fan of IDA bonds unless i know the project or the organization. I'm first in line for things like school bonds, sewers, water,and I love slammer bonds. Housing under par is a deal, usually AA or AAA rated. It's all about comfort level. I don't want any of this stuff waking me up at 3am. In 25 years i've never had a muni default. And over that 25 year span i've bought some scary stuff.
 
If you become a student of munis you will learn what to buy and not to buy. You will develope you own buying process and determine your own parameters. That's what you will bring to the table. And that's what will set you apart.
 
Oct 28, 2008 10:02 pm

Sounds good, I'm going to load up on CA and FL bonds tomorrow!  Thanks for the insight BG!

Oct 28, 2008 10:55 pm

im with the munis. they have been getting hit recently especially some of the revenue or lower quality bonds.  but at least you dont have to worry about the massive redemptions some of the muni funds have had to drive down funds.  i have been buying tons of GO's sticking to ultra high quality.  finally got a rally in the muni market last few days biggest rally in 27 years.  i also like some of the short term high quality corporates out there 2-4 year space.  see some nice 6-7% yielding bonds from dow companies.  beats parking into a money market or cd right now at 3%

Oct 28, 2008 11:19 pm
BondGuy:
 I love slammer bonds.



OK...I'm not a muni specialist, but I've been around the block once or twice....what in the name of all that's holy is a slammer bond?

Oct 29, 2008 12:02 am

Put 'em in the slammer!  You know, jail. 

On the subject of munis, why the hell were all the long muni funds down today? Vanguard, Oppenheimer, Pioneer...all down 1-5%. 

Oct 29, 2008 12:26 am
gvf:

On the subject of munis, why the hell were all the long muni funds down today? Vanguard, Oppenheimer, Pioneer...all down 1-5%. 

 
Stocks up, bonds down?  Seems about right.
Oct 29, 2008 12:31 am

All my closed-end munis were up nicely today, just thought it was a bit strange to see all the open-ended long's off by so much....

Oh wait I see, that was a joke, you're trying to tell me that stocks and bonds are uncorrelated

Oct 29, 2008 12:20 pm

No news from yesterday. Could be that the normal correlation between stocks and bonds could have played a role. Oh, wait, that's not possible. It also could be some profit taking from last week's massive rally.

 


The closed ends trade as stocks and like stocks. And not the kind of stocks you love to own in a conservative account. They trade like micro caps on light volume. it takes nothing to drive them in either direction. Unforunately that direction is usually down.
 

Munis off again this morning.
 
And yes, Slammer bonds are for jails. Sorry for the bond speak.
 


Buy buy buy!
 
Lastly, no one has to give up their day job of being the Excellent Financial Advisor to develope a muni/fixed income niche. Either develope it as a side biz or fully incorporate it by becoming a Wealth Manager who utilizes fixed income to provide the solutions to the wealth management puzzle. After-all, a large chunk of what we do revolves around providing and developing income.
Oct 29, 2008 1:49 pm

And let's not forget, most people with serious money or income, and a lot of old-school retirees are also muni buyers.  You look at the after-tax yield on a 5% muni in the 35% combined tax bracket...7+% income on a very safe investment is nothing to slouch at.  And it doesn't matter if the bonds go to 50 - you still get to clip that coupon.

Oct 29, 2008 10:20 pm

Munis are very attractive but there are also shorter term highly rated corporates. I found some attractive GE AAA 4 yr paper yielding 6.60% today.

Oct 29, 2008 10:22 pm
gvf:

Put 'em in the slammer!  You know, jail. 

On the subject of munis, why the hell were all the long muni funds down today? Vanguard, Oppenheimer, Pioneer...all down 1-5%. 

Oppenheimer only goes 1 direction....45% down this year......
Oct 29, 2008 10:35 pm
noggin:

Munis are very attractive but there are also shorter term highly rated corporates. I found some attractive GE AAA 4 yr paper yielding 6.60% today.





I wouldn't touch many corp's over 5-7 years right now. But you're right, the short stuff looks pretty good.



Everyone should be looking at muni swaps on their short paper right now. I've been selling 5 year, 4% muni's (LT close to maturity) at premiums (or close), and buying 15 year muni's at 5%+ selling at 75-85. How can people NOT want to do this??!!

Oct 30, 2008 10:26 am

Speaking for Opco, they are at ground zero of the muni market lock up. They own large positions of spread market bonds - non rated paper- dirt bonds- inverse floaters- tobacco bonds and host of other paper that has been hit hard by the market freeze. The further one moves from 3 months and triple A rated the larger the market discount. It's been ugly for long term holders of this fund and its sister OPTAX fund.

 
However, as I've written before the muni market is upside down. Tax free money markets carry higher yields than long term bonds, top tier issuers like Harvard University are seeing their paper trade a ridiculous level. So, if issuers like Harvard are trading at de minimis levels, what chance does a non rated Gloucester County NJ IDA bond for a landfill have at trading anywhere near par, regardless of coupon? That would be none.
 
Tuesday, the funds were rocked by Blackrock's selling a 250 million dollar block of tobacco bonds. As those bonds hit the street the flood gates opened with other tobacco holders selling an additional 100 million dollars of bonds in an effort to get out ahead of Blackrock. Unofficial word is Blackrock was forced (by mother merrill?) to raise cash. The sale hammered tobacco bond prices thus hammering the funds that own them. Yet, nothing has changed in tobaco bond land. The coupons payments keep on coming. Those bonds are a steal today!
 
The good news for Opco holders is that up til the end of september the inflows were positive 1.2 billion ytd. The Rochester funds funds, unlike most muni funds, are widely diversified with well over 1000 issues per fund. As of the last report, two weeks ago, there was still positive pressure on the fund's dividend. More good news for shareholders is that Opco's management is committed to their style and won't change styles to acheive better short term performance. Such a change, common at many funds,  would screw shareholders by significantly reducing the dividend and stiffling along term recovery.
 
As it stands the performance of ORNAX and OPTAX is liquidity based, not credit based. In fact, the non accrual rate for ORNAX is 1.5% today versus 4.5% three years ago when Morningstar carried them as a five star fund and Lipper annointed them number one bond fund status. Today they carry a yield roughly double what it was 3 years ago because of the "Muni market price dislocation" yet they have a higher quality portfolio than they did three years ago. As I said, the market is upside down.
 
The time to strike is when the opportunity presents itself. This fund is run by some of the best muni bond managers on the street. Invest as you will, but for select clients, call me a buyer.
Oct 31, 2008 3:01 am

High Yield muni's have historically been one of the least volitile asset classes.  When spreads widen to levels never seen before, I am ALWAYS a buyer.  This absolutely SCREAMS BUY! The process by which you make money off high yield muni's and corporates over the next few years is called "reversion to a mean".  Whenever something happens that is so uncharacteristically illogical, it's time to back the truck up and BUY!  It amazes me that many investment professionals are frozen by the same fear as their clients.