Muni bonds oversold?

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Aug 27, 2007 10:42 am

Over the past few weeks Munis got thrown out with the trash. Finally, the yen carry trade bites the ordinary investor. Are Munis oversold? Only time will tell, but 5.25% NY Thruways? Hmmm?

Aug 27, 2007 6:57 pm

there was an article in this past issue of business week, citing the  potential impact that the kentucky ruling may have in september.

Aug 28, 2007 12:03 am

Ask yourself where you think the 10 yr treasury is headed, short and long term?  I still think investors should stay with short term bonds due to the uncertainty in the overall bond market.  If China starts dumping t-bills ALL bond prices will drop hard.  JB- Certified Networked Advisor (CNA)

Aug 28, 2007 12:07 am
jackbauer:

Ask yourself where you think the 10 yr treasury is headed, short and long term?  I still think investors should stay with short term bonds due to the uncertainty in the overall bond market.  If China starts dumping t-bills ALL bond prices will drop hard.  JB- Certified Networked Advisor (CNA)


If China starts dumping t-bills, EVERYTHING will drop, not just bonds.  It could be the beginning of a HUGE, LONG downturn. 

Aug 28, 2007 12:10 am

agreed (with snaggletooth). Shorter term bonds should provide more time to jump.  My solution is look international and look to gold.  JB- Certified Networked Advisor (CNA)

Aug 28, 2007 12:12 am
jackbauer:

  JB- Certified Networked Advisor (CNA)



Is CNA a real designation?  What is it and is it approved to be put behind your name such as other designations? 

On the bond point, I agree they have a little to go, but still adding to them with rate cuts coming. 

Aug 28, 2007 12:17 am
jackbauer:

agreed (with snaggletooth). Shorter term bonds should provide more time to jump.  My solution is look international and look to gold.  JB- Certified Networked Advisor (CNA)


My solution is to move to cash and stuff it under the mattress...


Just joking, but it wouldn't be pretty.  An annuity with a 5% yearly step-up could easily outperform most investments if China dumped.

Aug 28, 2007 12:20 am

I assumed the client was looking for income.  VA may not be the best BET.  Cash is actually losing value vrs inflation and most reputable currencies... time for the good reps to shine and the bad reps to switch to real estate.

Aug 28, 2007 12:23 am

Sorry, I wasn't talking about taking income.  I was also joking on the cash issue.  Sarcasm is hard to read on the internet.


I will be selling gold bullion bars to my clients............

Aug 28, 2007 12:48 am

when is silver going to pop up>?  I like GDX, SLV, GLD...

Aug 28, 2007 12:53 am
jackbauer:

when is silver going to pop up>?  I like GDX, SLV, GLD...


Sometime in the future.  Until it does, it will either go down or stay the same.  If I had a crystal ball I would only manage my own money.

Aug 28, 2007 10:41 am

Yeah, the future is unknowable.


I know that 5% plus for LT bonds is very good.


I know that with Munis trading at 83% on the short end and  96% of treasuries on the long end, they start to make sense for a lot of people.


Also a great time to do pre-re swaps.


Just tryin to get your attention on a part of the market that is usually overlooked in this pay a fee world.


Reread the first line above, realize opportunity when it presents itself, and get on the phone.


Or not, you make the call.

Aug 28, 2007 1:57 pm

I didn't see 5.25% Thruways, but I saw Thruways and I got on the phone. You almost never see those.


Makes you wonder where the Franklin trader is this week.


What are you saying about the Pre Re swaps? Out of the Pre Re and into a longer maturity at the higher rate? Why just Pre Re's?


I love calling clients on these rates, you know what they say after you buy them for them? "Thank You! Good Job!"


Maybe in two months they'll be less happy, but that's always the way anyway.


It's nice of you to have come here and mentioned them (I wasn't going to call anyone's attention to them, not until I could eat a single one more!)

Aug 28, 2007 2:24 pm
Whomitmayconcer:

What are you saying about the Pre Re swaps? Out of the Pre Re and into a longer maturity at the higher rate? Why just Pre Re's?



Pre refundeds because a lot of them are selling at a premium right now and you're going to lose out on it if you wait for the prerefunded date.  Capture a 2-4% premium and look for a bond with a better rate.  You can probably find some at better yields with similar maturities.

Aug 28, 2007 4:47 pm

Spiff,


Sorry but it doesn't actually work that way.


When a bond has an above market coupon it trades at a premium to par, and you will lose that premium as the bond marches towards maturity, but you don't actually lose it, you are getting what you will lose in higher current income.


Further, this is not particular to Pre Re's  it is a universal truth to premium bonds.


I'm wondering if there is a specific reason that Bond Guy knows of for trading out of pre res (as opposed to all short maturities) unless there is a credit quality spread play that he's looking for.


I have noticed that as bond rates are looking to go higher, the Pre Re rate will increase (as in the number of bonds that get pre re'd) and so there is a game to be played especially amongst lower quality paper where the issuer will lock in todays rates by Pre Re ing debt, which then trades higher due to the higher credit quality (although this may be mitigated by the shorter maturity, and since we're not talking about buying these bond at a discount, there can be a negative issue in there as well) But if you can find a bond with an at or above market coupon that is trading low and has a near call date, that's a prime candidate for a pre re (and hence you get a long term, low quality rate for a short hold which is made even better by a YTC actuality!)


But then, the question remains, are we in a rising rate environment or is this an aberration? If it's the latter, then there won't be extraordinary pre res.


Meanwhile, there has been some noise in the muni insurer area about MBIA's (used generically) exposure to the Sub Prime issue with it's own investment account and what that might mean to it's ability to pay.


That's one reason the NYS Thruways are such choice paper. Along with NYS Environmentals which carry a AAA without insurance (Thruways don't as far as I know) they are a strong credit, owing to the fact that they own the most important corridors for commerse and tourism in one of the nation's most populous areas, and they have the ability to raise tolls without much ado (especially now with EZ Pass).

Aug 28, 2007 6:29 pm
Whomitmayconcer:

I didn't see 5.25% Thruways, but I saw Thruways and I got on the phone. You almost never see those.


Makes you wonder where the Franklin trader is this week.


What are you saying about the Pre Re swaps? Out of the Pre Re and into a longer maturity at the higher rate? Why just Pre Re's?


I love calling clients on these rates, you know what they say after you buy them for them? "Thank You! Good Job!"


Maybe in two months they'll be less happy, but that's always the way anyway.


It's nice of you to have come here and mentioned them (I wasn't going to call anyone's attention to them, not until I could eat a single one more!)



Usually in a pre-re swap there is a maturity give up.


For example I swapped on group of bonds with a pre-re in 13 and moved out to 36. The client picked up about 100 beeps on the income side, booked a loss on the sell side(that was going to be booked on pre re day anyway), and locked in the higher yield long term. All done with a point and a half on both sides of the trade. So everyone had a nice day, client, firm ,and advisor.


What made this work was the fact that the pre-res were LT before they were prefunded. This particular client is an LT income guy.


I do these types of trades often, yet the recent throw the baby out with the bath water muni bond market made this particular trade doable. And there are a lot more trades like this out there. Everyone just needs to go thru their book and look.


Swaps, as you know, are a case by case trade. What makes sense for one client may not make sense for another. However, if I see an attractive bond i start to look for ways to swap into it. So, to answer your question, a bond need not be prerefunded to be a swap candidate. Just that  pre res work well in this environment. Going from short term to long. You can lock in the opportunity created by this aberation in bond market. And if the worst thing you ever do to a client is get them 5% tax free, well. that's not such a bad thing.

Aug 28, 2007 6:41 pm

Sorry if i didn't make this clear. pre res because those clients are LT investors who suddenly(or not dso suddenly) find themselves holding ST paper. The clients are agreeable to the swap because their current holdings no longer fit their investment objective. But only if there is meaningful benefit. And while that benefit must pass the litmus test, in reality it's in the eye of the beholder, that is the client.


Premium bonds do make better swap candidates because even though, if held, the client will book the coupons to cover the loss, the loss is already built in. The client knows it's coming. Doing a swap that increases the client's income while not increasing the loss is a lay up trade.