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Posts Tagged ‘municipals’

Municipal Bond Fund ‘Swan Dive’

Posted by Larry Doyle on October 13th, 2009 12:08 PM |

Investors have traditionally bought municipal bond funds for income purposes. The tax-exempt status provides real appeal and the default rate on municipals has always been exceptionally low.  Against that backdrop, ‘munis’ have always proven to be less volatile than equities and many other sectors of the bond market . . . until now.

If a picture tells a thousand words, this graph of a Nuveen National Municipal Closed End Fund (ticker NXR) is more than a short story. From the Sense on Cents link to The Wall Street Journal‘s Market Data page, we learn:

That cliff-like drop on the right side of the graph represents approximately a 7% decline in the value of this specific fund culminating in a precipitous 5% drop just yesterday. Part of the decline is explained by the fact that yesterday this fund traded “ex-dividend,” meaning that investors who purchased the fund yesterday are not in line to receive the October dividend. That dividend represents a minor part of the overall decline in the value of this fund.

What does the decline truly represent? The fact that bonds in this $185 million fund declined in value. Why would that happen? The municipalities which had issued these bonds are likely having problems refinancing their debt. What does that mean? Those municipalities will be forced to pay higher rates. And what does that mean? Their outstanding bonds, such as those in this national fund, decline in value. Additionally, the higher rates mean the municipalities will remain hard pressed not to cut services and employees.

Keep your brokers and financial planners honest and compel them to fully explore the credit quality of investments (whether bonds or equities) prior to investing. Otherwise, picture yourself as having invested in this fund a month ago and now eating a 7% loss as you take a ‘swan dive’ off the right side of the above graph.


Municipal Finance: Will Uncle Sam Post Bail?

Posted by Larry Doyle on May 26th, 2009 3:09 PM |

Is every village, town, city, and state in our country poised to receive a “get out of jail” free card from Uncle Sam? I linked to The New York Times article, Localities Want U.S. to Support Muni Bonds, in the Newsworthy section of Sense on Cents. Upon further review, it deserves comment.

In my opinion, this support of the municipal market may very well represent the greatest violation of a moral hazard to date. Why? Municipalities are by edict required to balance their budgets. A municipal budget which is able to obviate the tough decisions and choices in the budgetary process will lose that rigor.

Politicians of all stripes will make the case that the municipal default rate is extremely low and, as such, a federal backstop in the form of bond insurance is truly a very low risk proposition. Please allow me to opine that the same argument was made in the quasi-guarantee provided to Freddie Mac and Fannie Mae. Those two giants are now wards of the state having been utilized by politicians from both sides of the aisle as campaign “piggy banks” for the better part of twenty years.

The New York Times highlights that the federal guarantee of municipal debt is not all that Uncle Sam may be asked to bail:

“All kinds of municipal borrowers are facing revenue shortfalls,” said Mr. Decker. “California is the largest example. Some states are better off than others. But all outstanding debt is backed by tax revenues. And municipalities are facing a greater or lesser level of distress.”

Also clamoring for help is a group of municipalities that purchased Lehman debt, which is now nearly worthless. Legislation authorizing the use of relief money to make these purchases was introduced by two California Democratic representatives, Jackie Speier and Anna Eshoo. If approved, this would be more like a bailout than a guarantee, because the federal government would be paying face value for debt that otherwise has little value.

The price tag on that proposal is around $1.6 billion. The argument promoted by the two congresswomen is that the Treasury and Fed allowed Lehman to fail, causing governmental bodies to lose money.

Whether a price tag is $1.6 billion, $1.6 million or $1.6 trillion a potential federal bailout of a poor investment decision is the antithesis of free market capitalism. Where does it end? (more…)

Where Can I Put My Money?

Posted by Larry Doyle on March 11th, 2009 5:06 PM |

With stock markets down 15-20% on the year and 50% over the last 14 months, everybody in the market is asking the same question, “where can I put my money?” While many asset managers are touting the equity markets as a great buy at these levels, cooler and calmer heads are stating that the economy and markets are likely to have a slow recovery. The question screams where to put one’s money to earn more than the pittance offered in bank checking and savings accounts.

I read a very informative piece in today’s WSJ, Locking In Returns You Like. First off, this piece is very user friendly. It provides a wealth of information and links to websites which will provide good market insight.

Over and above referencing some quality products (GNMAs, TIPS, municipals), it also broaches the topic of  laddering which I believe is a very valuable technique in building a bond portfolio.

Additionally, the article highlights FPA New Income Fund which is managed by one of our Economic All-Stars Bob Rodriguez. (I have no professional relationship with anybody on this site!!)

I think you will find this article a very valuable resource and I would recommend putting it in the “save” column for future reference. As you review the products highlighted and topics broached, please do not hesitate to ask anything you may not fully understand.


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