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Muni bonds, unlike men, ultimately mature

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Jul 22, 2008 9:22 pm

It’s time to buy income.

  Over the past 8 or so months for just the 5th time since 1985 the yield on the 30 year treasury is lower than that of AAA 30 year munis.   What does this mean?   It means any advisor not buying munis for their clients should be shot! or at least fired! or at least given a free trip to the whoopin shed!   What's happening now in the muni market is unpresedented. That's fancy technical Wall Street bond speak for as "it's never happened before!" We've never stayed this low  relative to treasuries for this long. There are a lot of reasons for that, that you already know.   What do you call it when you have low bond prices without the corresponding high interest rates? Buying opportunity!   What do you call it when you have falling bond prices without rising default rates? Buying Opportunity!   It is time to 'Buy income"   Don't get hung up on the Fed's next move. Don't get hung up on the macro economic situation. Don't sit down with your calculator and figure out how TF bonds will fit into your asset allocation model. This is for income buyers only.   Buy the income, lock in the high yield,  and ride the cycle.   Right now and for about the past year munis have been in a down cycle.  I can't predict the market, so I won't do that. Nor can I predict the bottom, so I won't do that either.  What I can tell you though with absolute certainty is about cycles. And that is that they cycle. Sooner or later muni prices will cycle up. And because we are income buyers we are happy to be paid for our patience.   And here's the best part: right now when compared to treasuries, we're getting the tax free part for free! What a deal, just buy bonds!
Jul 22, 2008 9:31 pm

Great points, BondGuy.  And certainly one of the most witty titles/subjects ever for a post. 

Jul 23, 2008 12:46 am

Thanks Morphius. I'd like to take credit for the title but I can't. It's a running joke in the world of bonddom.

Which brings me to another point: Clone what works.
Jul 23, 2008 9:11 pm

My 2 cents:

  Be very, very selective about the muni's you recommend. Keep in mind, the pending bankruptcy of Vallejo, CA & noises from within the Fed about jacking-up interest rates to fight inflation. Some municipalities are having a hard time raising the cash to meet their budget. Combine that with possible interest rate increases and you have a potent mixture that could deny your clients a respectable return.   (Disclaimer: I'm bearish on the US economy.)
Jul 23, 2008 9:22 pm

(Disclaimer: I’m bearish on the US economy.)

  Nooooooooooo...   Dobe, what you doin'...burying it all in the back yard?
Jul 23, 2008 11:20 pm

BG, What maturities do you like.  I recently sold a 30yr Muni to someone who swore they understood price fluctuation and when his first statment came valued at 92 (bought at par) he was pissed.  Shame on me for not explaining it better or my firm for not pricing or estimating it better, but for now anyway, this 20k account opener blew me a shot at his 5MM.

Jul 24, 2008 12:41 am

I don't think you should blame your firm.  Bonds almost ALWAYS come out of the gate lower.

Jul 24, 2008 4:24 am


    Try this helpful hint.....Bonds are almost always priced below their true value by the bond pricing services that firms purchase.  You can go to, plug in the cusip, and find out when ALL the trades have gone through and at what price.  If the client doesn't believe you that the trades have been going through at a higher price than that on the statement, have them look it up themselves.  Hope this helps.

Jul 24, 2008 10:54 am


  Dobe, what you doin'...burying it all in the back yard?[/quote]   Nah, my bomb shelter takes up most of the backyard, so there's no room to bury it. I'm just putting it in companies and/or countries with little or no dependence on the US economy.   By the way, know anyone lookin' for a good deal on aluminum hats?
Jul 24, 2008 5:58 pm


BG, What maturities do you like.  I recently sold a 30yr Muni to someone who swore they understood price fluctuation and when his first statment came valued at 92 (bought at par) he was pissed.  Shame on me for not explaining it better or my firm for not pricing or estimating it better, but for now anyway, this 20k account opener blew me a shot at his 5MM.

[/quote]   Empathize, don't apologize!   Some thoughts:   There's nothing wrong with the bonds purchased. In fact wall street is having a tax free bond sale. Buy more! Or, your guy with 5 mil ready to go could sit out the cycle on the sidelines and then pour his money in at the top. yeah, that makes sense!   Bottoms are impossible to pick, so don't try to do that.   Today, in my neighborhood, a trash truck came down the street at about 10 after 6. Twenty minutes later the recycling truck showed up. On the way in this morning I was slowed by the county repaving project.  You know, 8 guys standing around while one guy moved dirt from pile A to pile B while an unmanned steam roller sat idling. As I drove past the middle school the dumb asses were mowing the  grass in the rain. And the Cherry Hill Police were set up in their normal AM speed trap. I snuck Zippy the Mini past them at 4 over. As I traveled the overpass over the New Jersey Turnpike I noted that traffic was running just like any other morning. Likewise for the wait at the toll plaza for the Walt Whitman Bridge into Philly. As I zipped by, the parking lot to the PATCO High Speed Line was jammed, as it is everyday. Strangely, on mainstreet, it is business as usual. Yet when I look at the prices for the bonds for these places and entities, Cherry Hill TWP G.O.s, Camden County IMP Bonds, NJTP bonds and DRPA bonds, they all have one thing in common, their prices are in the crapper. Hmm? Buying opportunity or bear trap? For income buyers, does it matter? The answer is NOPE.   "Mr jones, we're not happy to see the prices of your bonds going lower either. It makes my job tougher. And my job is to convince you that the low prices you are seeing represent a positive, not a negative. That's not easy to do when you see your account value going down. So, my job is really hard right now. What's happening is this; the baby is being thrown out with the bath water. Tax free bonds is the baby.  Large institutions who are over exposed to sub prime mortgages are being forced to sell their highest quality assets just so they can stay in business. They need to raise capital. Among the very highest quality assets that they are selling are tax free bonds. This has put incredible downward pressure on the tax free bond market forcing prices lower. Add to this that these institutions, banks , insurance companuies ,hedge funds, were major buyers of tax free bonds and they are no longer buying. This has left us with a soft market devoid of major buyers. Now, there are a couple other things going on that are adding to the soft market, but this is the major factor. Yet, Mr. Jones, in your neighborhood the trash is being picked up , the police are on patrol and the fire department is manned and ready. On main street, it's business as usual. This is a wall street problem not a main street problem. Your town, county, and state are still operating normally. All these entites are financed with tax free bonds. Taxes are still being collected and the bonds are paying interest every six months just like they should. Yet their prices are significantly reduced over where they were a year ago, and are historically much lower than they should be. This is bad news if you own these bonds and need to sell them today. For everyone else, including you this is good news because it gives you an opportunity to take advantage of the low prices and lock in the high yields by buying these bonds today. As time goes on, using history as a guide, prices will cycle back the other way and this opportunity will pass. For the bonds you own, be patient and grit your teeth if you have to, there is nothing wrong with them. Sit back and collect the interest. And then get your check book out, because wall street is having a sale, a tax free bond sale, and if you are in a position to do so you should buy more. Let me show you what we like today."   Price deterioration can swamp yield, yet for income buyers the right answer is to lock in the high yields and ride the cycle.   "Mrs smith i have no idea where interest rates are going to be a year from now. I sure hope they are higher because then I can get you even more income, but I can't predict that. What I do know is that the bonds I'm offering you today are a fantastic deal and you ought to take advantage of them. If rates move up we'll just buy more. And if rates move down, well you've locked in a great return. Let's move ahead and lock in these rates, how many bonds would you like to take today?"   Oh, and by the way, to answer the question, we buy up and down the yield curve on a case by case basis. We prospect with long term bonds. Nothing wrong with buying 30 year paper.