Bonds, Muni's and BAB's

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snaggletooth's picture
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I want to have a discussion, perhaps a debate, about individual bonds vs. bond funds and/or closed-end bond funds.  Also, I want to pose some questions about the risk of muni's and the opportunity that muni's have in 2010.
 
First, I have historically bought bond funds or closed-end bond funds.  Sure, there is a management fee, but if the yield is good, why not?  I don't have to worry too much about individual default and I believe the managers can get better deals on bonds than I can.
 
So am I missing something for those of you that do individual bonds?  I mean, you sell someone an individual bond with a 10 or even 20 year maturity and have to make sure it doesn't default.  I can sell a UIT or bond fund and have immediate liquidity or at worst 1 year.  The yields are attractive, average credit quality is good, so what's the deal?
 
Secondly, about muni's.
 
So we have heard BAB's may not be issued after 2010.  From what I've heard, there will be a large amount of BAB's issued in 2010 before the clock runs out.  This quite possibly means not as many muni's will be issued.  If that's the case, then muni's would be in higher demand, which will bode well for their values.
 
In addition to that, as tax rates go up, muni's become more attractive.  So I've been buying and will continue to buy.  I don't see much risk in local municipalities being able to meet their debt obligations, but I'm open to debate that with some of you.
Any opinions out there about this stuff?

snaggletooth's picture
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mlgone wrote:Are you worried at all about when rates start to move up?
 
Only if your maturities are long.  I've been buying short duration funds, senior notes maturing eery 60-90 days, and muni's no longer than 7 years.  I feel good about it.

snaggletooth's picture
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mlgone wrote:I have slowly been exchanging some Pimco Total Return with Pimco Real Return to protect against those moves
 
Interesting.  I'll have to look at that as well.  I've used the Pimco All Asset and All Asset All Authority funds as well.  It's been awhile, so I should sit down and review it.

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B24
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With munis, I almost always buy individuals (if they have a "real" amount to invest), as normally these clients are buying purely for the income, not really caring about the MKT value.  If you buy at least 10 different munis, sure you have somes default risk, but it is very, very small.  I don't buy CA bonds, and I don't buy anything below BBB (and mostly only A and above).  I do use state-specific muni funds for div reinvestments if they don't need the income right now.
 
So I think it really depends on what the purpose of the bonds are.  For me, if it is PURELY for the income, I buy individuals (or occassionally UIT's).  If it is part of a dynamic asset allocation portfolio (meaning you rebalance and make adjustments, etc.), I use funds or ETF's.
 
I just think individual bonds maximize yield for people that are living off the income.
 
Personaly, I bought a ton of muni's over the past year at GREAT yields, and have no intention of ever selling them.  I have had to sell some for clients because they rose so much in value, that they wanted the profits, even though I objected.  When you have in-state high-quality muni's that you bought close to 6% yield, you keep them!  Some total return funds would sell them for gains.

snaggletooth's picture
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B24 wrote:With munis, I almost always buy individuals (if they have a "real" amount to invest), as normally these clients are buying purely for the income, not really caring about the MKT value.  If you buy at least 10 different munis, sure you have somes default risk, but it is very, very small.  I don't buy CA bonds, and I don't buy anything below BBB (and mostly only A and above).  I do use state-specific muni funds for div reinvestments if they don't need the income right now.
 
So I think it really depends on what the purpose of the bonds are.  For me, if it is PURELY for the income, I buy individuals (or occassionally UIT's).  If it is part of a dynamic asset allocation portfolio (meaning you rebalance and make adjustments, etc.), I use funds or ETF's.
 
I just think individual bonds maximize yield for people that are living off the income.
 
Personaly, I bought a ton of muni's over the past year at GREAT yields, and have no intention of ever selling them.  I have had to sell some for clients because they rose so much in value, that they wanted the profits, even though I objected.  When you have in-state high-quality muni's that you bought close to 6% yield, you keep them!  Some total return funds would sell them for gains.
 
Ok, see, this is exactly my question.  I've been buying Muni UIT's for income and reinvestment, that are yielding 6.5% net of fees, average credit rating of A and average duration of 7 years, 6 month cdsc.
 
I just don't see the value to the individual bond here. 

BondGuy's picture
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Individual bonds come with a maturity date. Regardless of what happens in the market the client gets their money back on that date.
Individual bonds are pure income instruments. No muss no fuss, just income generating machines unencumbered by fees. you get exactly what you sign up for.
 
Individual bonds are not subject to change. There are no surprise notices that the manager, to accomodate new shareholders, or through some other market blunder, has to cut the dividend.
 
Individual bonds are not subject to management f*** ups. Ok, the managers guess wrong on that big position and now the fund is down 10% with no way to get that money back.
 
Individual bonds aren't sold at the whim of an investment manager who sees his career passing before his eyes. The manager was long, lost money, and now needs to get short, he does so locking the loss and killing the income. This has happened more times than i can count.
 
Most bond funds are now managed for total return. This is done because most funds are sold as part of a fee driven asset allocation program. Because income generation is a secondary consideration for the fund's managers income projection for retirement planning is impossible.
 
UIts charge managment fees for putting together a ready made portfolio of bonds. The fees can negate most of the price advantages, if any, the managers may have received through their buying power or expertise. As well, one must carefully and fully understand all the call features of every bond in the portfolio, the relationship those calls have to the purchase price of the bonds, and that relationship to the current price of the UIT. It's possible to lose a lot of money through any misunderstanding of those relationships.
 
All that said, do i use bond funds? Yes, mostly for high yield bonds where it's safer to buy a fund than an individual bond. Also, for clients lesser amounts to invest and finally where there is a clear price/yield advantage.

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snaggletooth wrote:B24 wrote:With munis, I almost always buy individuals (if they have a "real" amount to invest), as normally these clients are buying purely for the income, not really caring about the MKT value.  If you buy at least 10 different munis, sure you have somes default risk, but it is very, very small.  I don't buy CA bonds, and I don't buy anything below BBB (and mostly only A and above).  I do use state-specific muni funds for div reinvestments if they don't need the income right now.
 
So I think it really depends on what the purpose of the bonds are.  For me, if it is PURELY for the income, I buy individuals (or occassionally UIT's).  If it is part of a dynamic asset allocation portfolio (meaning you rebalance and make adjustments, etc.), I use funds or ETF's.
 
I just think individual bonds maximize yield for people that are living off the income.
 
Personaly, I bought a ton of muni's over the past year at GREAT yields, and have no intention of ever selling them.  I have had to sell some for clients because they rose so much in value, that they wanted the profits, even though I objected.  When you have in-state high-quality muni's that you bought close to 6% yield, you keep them!  Some total return funds would sell them for gains.
 
Ok, see, this is exactly my question.  I've been buying Muni UIT's for income and reinvestment, that are yielding 6.5% net of fees, average credit rating of A and average duration of 7 years, 6 month cdsc.
 
I just don't see the value to the individual bond here. 

 
Muni UIT's yielding 6.5% net of fees?  First off, you can't reinvest them at the same yield (muni's yielding 6.5%, well, are no longer yielding 6.5%) as the market has pushed yields down.  Secondly, are these high yield muni's or CA only?  I just don't remember nationwide muni's yielding 6.5%.  But hey, maybe you know something I don't know.  Typically UIT's hold some great bonds, but the expenses push the yield down to a pretty average range.

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OK, I see that you mentioned "A" average credit rating.  I'm stumped.  Which company?

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Wait, are you talking about BAB's or tax-free's?  If they are BAB's then it makes sense.  I was thinking 2x tax exempts.  I actually had some decent luck with BAB UIT's due to lack of individual inventory.

snaggletooth's picture
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B24 wrote: 
Muni UIT's yielding 6.5% net of fees?  First off, you can't reinvest them at the same yield (muni's yielding 6.5%, well, are no longer yielding 6.5%) as the market has pushed yields down.  Secondly, are these high yield muni's or CA only?  I just don't remember nationwide muni's yielding 6.5%.  But hey, maybe you know something I don't know.  Typically UIT's hold some great bonds, but the expenses push the yield down to a pretty average range.
 
Here is what I'm looking at:  https://www.ftportfolios.com/Broker/dp/dpsummary.aspx?fundid=6455
 
There are some HY and some CA, but not all of them.  And the monthly dividend is reinvested at current market price, so it could be 6.5% or higher or lower. 
 
There is some leverage, which is how they get the yield up there, but with the yield curve the way it is, it makes some sense to leverage in a sane way.
 
Trust me B24, I don't know anything you don't...for the most part.  But I know I don't know everything, so I'm still learning here.

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The next big financial crisis is going to be the states running out of money. Happening in California, New York, a lot of states got through 2009 by using stimulus money from the feds. I don't know how that will impact munis, but it's a concern. .... Personally I would rather lend money to Coca Cola or JNJ than a municipality. .... I've got a client with some California munis that I worry about. Yeah, California has a clause in their constitution that puts the munis at the top of the list when the bills comes due, you know they'll have a referendum to stiff the bond holders so they can pay float people like that guy on here a few weeks ago who was retiring with a 100k annual state pension for riding around in a fire truck.

rankstocks's picture
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BAB's are still an anomaly.  Higher yields than corps with 10-20 times less default risk.  This disparity will not last.  Individual bonds are easier to sell to new clients.  When they hear "sewer system" or "school district" or "hospital", clients assume they are safe, and they usually are.  "Mr Client, unless people stop using the bathroom, how safe do you think your money is?"  Individual bonds cost significantly less and I sell them against funds all the time.  "Mr Client, why pay your advisor 30% of your income when you could buy this G.O. school district rate and pocket the difference?"

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UITs do most of what indiv bnds do (not all). I bet that after Lehman, CW, and CIT the $$$ going into UITs at Jones has skyrocketed. I remember it as being minimal before.
If a port takes big risks(like default risk) why not keep the bigger risks mostly to the equity side? Min risk on the income side by doing all bnds less than AAA in a pkg or an ETF. If they must have par value: UIT.
 

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rankstocks wrote:BAB's are still an anomaly.  Higher yields than corps with 10-20 times less default risk.  This disparity will not last.  Individual bonds are easier to sell to new clients.  When they hear "sewer system" or "school district" or "hospital", clients assume they are safe, and they usually are.  "Mr Client, unless people stop using the bathroom, how safe do you think your money is?"  Individual bonds cost significantly less and I sell them against funds all the time.  "Mr Client, why pay your advisor 30% of your income when you could buy this G.O. school district rate and pocket the difference?"
 
Exactly!

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buyandhold wrote:The next big financial crisis is going to be the states running out of money. Happening in California, New York, a lot of states got through 2009 by using stimulus money from the feds. I don't know how that will impact munis, but it's a concern. .... Personally I would rather lend money to Coca Cola or JNJ than a municipality. .... I've got a client with some California munis that I worry about. Yeah, California has a clause in their constitution that puts the munis at the top of the list when the bills comes due, you know they'll have a referendum to stiff the bond holders so they can pay float people like that guy on here a few weeks ago who was retiring with a 100k annual state pension for riding around in a fire truck.
 
The reason there is still opportunity in the muni market.

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BondGuy wrote:buyandhold wrote:The next big financial crisis is going to be the states running out of money. Happening in California, New York, a lot of states got through 2009 by using stimulus money from the feds. I don't know how that will impact munis, but it's a concern. .... Personally I would rather lend money to Coca Cola or JNJ than a municipality. .... I've got a client with some California munis that I worry about. Yeah, California has a clause in their constitution that puts the munis at the top of the list when the bills comes due, you know they'll have a referendum to stiff the bond holders so they can pay float people like that guy on here a few weeks ago who was retiring with a 100k annual state pension for riding around in a fire truck.
 
The reason there is still opportunity in the muni market.
 
Are you saying his perception of the risks in the muni bond market are inaccurate? 
 

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snaggletooth wrote:B24 wrote: 
Muni UIT's yielding 6.5% net of fees?  First off, you can't reinvest them at the same yield (muni's yielding 6.5%, well, are no longer yielding 6.5%) as the market has pushed yields down.  Secondly, are these high yield muni's or CA only?  I just don't remember nationwide muni's yielding 6.5%.  But hey, maybe you know something I don't know.  Typically UIT's hold some great bonds, but the expenses push the yield down to a pretty average range.
 
Here is what I'm looking at:  https://www.ftportfolios.com/Broker/dp/dpsummary.aspx?fundid=6455
 
There are some HY and some CA, but not all of them.  And the monthly dividend is reinvested at current market price, so it could be 6.5% or higher or lower. 
 
There is some leverage, which is how they get the yield up there, but with the yield curve the way it is, it makes some sense to leverage in a sane way.
 
Trust me B24, I don't know anything you don't...for the most part.  But I know I don't know everything, so I'm still learning here.
 
OK, OK, OK.  Now I see what you're looking at.  They are CEF portfolios, not UIT's with individual investment-grade muni's.  Most of the CEF's are either high-yield (below investment grade), or use leverage.  Anytime you see "high-yield" "high-income" "strategic" "advantage", etc. it's usually a sign that they are using something beyond investment grade (and/or leverage).  You can use a basic high-yield muni fund and get the same yield.  Remember, CEF's often derive yield from capital gains, based on how they are structured, so the NAV is slowly depleted over time.

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Spaceman Spiff wrote:BondGuy wrote:buyandhold wrote:The next big financial crisis is going to be the states running out of money. Happening in California, New York, a lot of states got through 2009 by using stimulus money from the feds. I don't know how that will impact munis, but it's a concern. .... Personally I would rather lend money to Coca Cola or JNJ than a municipality. .... I've got a client with some California munis that I worry about. Yeah, California has a clause in their constitution that puts the munis at the top of the list when the bills comes due, you know they'll have a referendum to stiff the bond holders so they can pay float people like that guy on here a few weeks ago who was retiring with a 100k annual state pension for riding around in a fire truck.
 
The reason there is still opportunity in the muni market.
 
Are you saying his perception of the risks in the muni bond market are inaccurate? 
 
 
I'm saying it takes diverse interpretation of those risks to make a market. If we all agreed, along with having a boring world, there would be no market.

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What a great thread!BG, are you selling CA bonds to clients?Or maybe I should ask it this way...are you avoiding CA bonds? Why or why not?(Anyone else can answer, I just have a mancrush on BG)

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OK. I have bought quite a few munis in the last year.

As a preface, I have traditionally bought individual bonds for most clients.

The big risk going forward as everyone here knows is rate increases, BIG increases. We cannot print money like Al Capone w/o paying the piper. I do not expect there is one chance that the fed will raise rates before the mid term elections, it will be suicide for Bernanke to do that will the dems in the position they are in.

I also do not think inflation will be of any major concern for some time. I was allocating to tips in my managed ETF models, but I am rethinking things. Two reasons. 10% of the population is out of work, with that much unemployment there will be little chance of consumers fueling 5-10% CPI growth. Second involves foreign investment. With the impending collapse of the dollar we cannot expect a surge of foreign demand for dollar based goods.

We are also on the verge of a 44% increase in the top tax bracket combined with the continued "evilacation" of success and wealth. That will suppress demand and fuel demand for munis.

Where would I be concerned or concentrated now? Short term munis on my sell list. The short end of the curve will be the first to go, and those are the ones that think they are the safest- 1-3 yr paper (funds that is, not individuals). The intermediate term stuff, say 6-12 yrs, will probably be ok. You are getting a reasonable rate of return and will probably not see a large decline in principal. Lets keep in mind that Muni rates are actually reasonable compared to taxable paper. They have not dropped and quite a few are actually higher (rate) than 2007. That will help hold prices when taxable equivalents come to parody. Long term will possibly serve people well. Hard to say. I think they are still priced attractive and with expected high demand due to tax increases should keep them from demise. I have heard the "death" of long term munis for some time. At the end of the day we are following all other mature economies. Over time our rates are getting lower and lower. They have to. We cannot keep growing as a country at high GDP/CPI rates forever.

Muni defaults. They will happen. Jefferson county AL will be a big one. Worst part is it is an essential services issue. I would give their water authority notes 1 to 2 years at best. That will really hurt short term as people re-adjust their RTA. The Cali model will follow- decent price decline followed by return to realization. Lets face it, Cali GO's were the best muni buy in a decade. By state constitution and covenant on the bond they cannot default until the lay off every employee of the state save teachers. Basically they have to pay teachers, then the bonds, then ANY OTHER BILLS OF THE STATE. Pretty safe in my world. Plus you got that whole little fact that by law a state CANNOT declare BK, period. We will have some default here and there, but not widespread. If you buy individuals stay with GO's and essential services. Here is where I start buying funds. No not Ron Felding and his crap (I know he retired). I am talking about Joe Deane (Legg), Franklin, Lord Abbett and other quality shops. They will dance the known problems and help play the curve plus diversify you. It is a great swap right now. "Mr Jones, we have made good money over the last year, lets book the profit and play safe" Plus you get paid (in general you don't holding a bond to maturity).

What am I doing? I am selling my individual bonds and trying to move people to templeton foreign bond. As the dollar declines, sovereign debt in foreign denominated currencies will appreciate. I am also moving into floating rates. Sh*tty place to be in a declining rate environment, but great to have in a rising one. Buy funds to replace the individual bonds with the same timeline. Joe D at Legg is brilliant in this environment. He hedges against rising rates. For those who staunchly say "I don't buy funds!", remind them that they also never though C, BAC, Fannie, Freddie, AIG and nearly every other financial company would, for all intents and purposes, go BK at the same time. Time to get over those preconceptions or be the next deer caught in the headlights.

Sorry for the ramble- a lot of thought on a complex topic.....

rankstocks's picture
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BondGuy, as always, you're a pimp.
shantom1, good post. I'm on board with most of your post, but I don't know if the dollar will weaken much more.  There's not much that will strenthen the dollar more than rising interest rates.  Also, when I get a Euro question every day, behavioral finince experience tells me that goose is cooked.  Therefore, I'm not sure soveriegn debt is the best place to be, and templeton foreign bond is almost all foreign "government" debt, if I am correct, which could get slammed if the recovery forces foreign rates to rise as well.  TIPS, by the way, are so overbought right now that I have been selling them like hotcakes (picked up a ton of 5-10 years a couple years back at 3% coupon).  I think there are some compelling buys in absolute return funds with good Sharpe ratios, and in the offchance there is hyper-inflation, most tend not to be interest rate sensitive.

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rankstocks wrote:BondGuy, as always, you're a pimp.
shantom1, good post. I'm on board with most of your post, but I don't know if the dollar will weaken much more.  There's not much that will strenthen the dollar more than rising interest rates.  Also, when I get a Euro question every day, behavioral finince experience tells me that goose is cooked.  Therefore, I'm not sure soveriegn debt is the best place to be, and templeton foreign bond is almost all foreign "government" debt, if I am correct, which could get slammed if the recovery forces foreign rates to rise as well.  TIPS, by the way, are so overbought right now that I have been selling them like hotcakes (picked up a ton of 5-10 years a couple years back at 3% coupon).  I think there are some compelling buys in absolute return funds with good Sharpe ratios, and in the offchance there is hyper-inflation, most tend not to be interest rate sensitive.

As a discussion I have to ask how has the dollar weakened?  Right now the dollar is fairly strong mainly due to continuing demand for tbills.  Sooner or later that trade is going to reverse, and reverse hard.  When we publically say we as a nation will have a trillion dollar deficit for the forseable future that can only translate to currency decline.  Once the tulip craze is over the door will not be big enough.  I know that foreign govy debt will drop on local markets as they start raising their rates too, but the currency moves will far outweight any decline due to rates.  I am least comfortable with Euro based debt, they will probably be in parody with the US. 

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rankstocks wrote:BondGuy, as always, you're a pimp.
 
Not quite sure what you mean by that. Generally, i agree with the rest of your post. Our thinking is shared on looking for fixed income opportunities across many markets and product types.

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Can you guys elaborate on moving to funds versus individual munis.  Also, I don't follow the concern on short-term munis.  I have a lot of cash in short term muni funds right now.  That comment concerned me.

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BondGuy wrote:rankstocks wrote:BondGuy, as always, you're a pimp.
 
Not quite sure what you mean by that. Generally, i agree with the rest of your post. Our thinking is shared on looking for fixed income opportunities across many markets and product types. BG - it means "you're the man".

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B24 wrote:Can you guys elaborate on moving to funds versus individual munis.  Also, I don't follow the concern on short-term munis.  I have a lot of cash in short term muni funds right now.  That comment concerned me.

If you look at the yield curve the short end is the part out of whack the most.  With 2-3 yr munis yielding less than 1% there is quite a bit of movement possible.  Since these funds are general sold as safety plays a client will not be too happy to see his fund drop 3,4,5 or more % in a short period of time.  The biggest problem is they are not being compansated for that risk.  The ultrashorts are getting 1-2% at best.  If you move them a little furthur out the curve you still have rate risk but the client is being paid for that risk.  For the reasons I outlined earlier I don't think there will be a major drop on these bonds (they will correct a little, but muni buyers should be used to seeing the ups and downs). 
 
I am moving from individuals as a diversification play.  Local govts are in tough shape and my day is busy enough- I'd rather rely on an experienced manager to make the calls for me on this one....

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Shantom1 your post is well thought out as is Ranks, and both serve as examples of having an opinion and acting on it. Something lacking in many offices across the country. Regardless of how right or wrong those opinions turn out to be is less important than having them. It takes a lot of work to have an informed opinion. Clients with advisors putting in that work are in good hands.
That said, my fixed income business is much simpler than either of theirs. I'm simply looking for the highest income i can get today for the risk taken without regard for the future. I know how crazy that sounds. And how reckless that must seem to the sell it from the chart crowd, but really it's not.
 
There are two reasons it's not the design for catastrophe one might be led to believe. First is a rule I live by : The future is unknowable. No one knows what will happen. Correct me if i'm wrong but we were supposed to have higher interest rates by now. Well, that is, if you listened to the analyst from a year ago. And, I'm still looking for someone, anyone, who predicted the crash-credit freeze up- near collapse of our economic system in 2008. It's one thing if Joe Lunchbox gets crushed by the bear, it's quite another when it's hedge fund managers, mutual fund managers, and the rest of the pros who are getting run over.  No one knew it was coming. I'd still like to find the analysts who predicted the bond market meltdowns of 94 and 98. Or the guys who saw 2001-2003 coming? I can't find them because these people don't exist.
 
Secondly: it takes an opinion based on vast market experience and knowledge to be able to say the future is unknowable. The point being I'm not acting in a void. Just as the sell it from the chart guys have an opinion, so do I, that is, the future is unknowable. Let's take it out of the equation. We can either hedge against all possibilities or not. That's up to the client. It's that simple. And for income buyers it's even easier. Because there is no way to know if the cost of waiting will be less than the cost of acting today what do you think we should do? Buy the income needed today. If rates go up what do we do? OMG! Ah, we just buy more. Or, very worst case- the client holds tight and gets exactly the income they signed up for. What if rates go down? For some we trade and lock profits. For others- we hold tight, get exactly the income signed up for, and admire the good looking statements. Low IQ and very simple!
 
For those who doubt that the future is unknowable I will offer more proof.  Right here on this thread two very well informed advisors have divergent opinions on what the future will bring. Both advisors are acting on those opinions. Yet one will be right and one will be wrong. The problem for both and anyone who thinks like them is we don't know which one of them will be right. Why? Repeat after me; because the future is unknowable!
 
Lastly, i disagree on shantom's opinion of Ron Fielding.
 
To fault Fielding for the performance of his fund in a credit lock-up is like faulting an architect for not designing a building that could withstand a 500mph hit from a fuel ladened jetliner. Some things are just outside the design parameters of the buildings we inhabit and the funds we invest in. I commend Fielding for sticking to his prime objective of delivering the highest income possible and not selling out share holders by changing that objective in moving to short term less volatile instruments. As spread market continues to recover, so will the fund. Will it ever recover to its former value? Will XOM ever hit 90 again? I don't know, the future is unknowable.

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I hear what you are saying about not knowing the future, I'm just trying to plan for it.  I do not make wild swings with portfolios.  My ideas shift focus not total direction of a portfolio.
 
I do however fault Ron Felding.  I for one have not bought RMUNX or ORNAX for a client since the early 2000's and I have had 0 on my books for the better part of the decade.  As you say here is where opinions differ.  I fault him for going from #1 to dead last in one year returning the worst one year performance in the history of muni fund performance.  You trust a muni manager to make good calls.  The fund's objective was to provide a high income "while using our significant experience researching issuers, creditworthiness and security structures in search of good values to provide a high level of income and to minimize the threats of default and principal decline"  They failed their own objective. 
 
Franklin NY tax free on the other hand was only a tick behing in total return in the 90's and early 2000's, but it held up REALLY well in the last two years.... 

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shantom1 wrote:
 
I do however fault Ron Felding.  I for one have not bought RMUNX or ORNAX for a client since the early 2000's and I have had 0 on my books for the better part of the decade.  As you say here is where opinions differ.  I fault him for going from #1 to dead last in one year returning the worst one year performance in the history of muni fund performance. 
 
Our opinions do differ. The markets collapsed. Even the treasury market was in danger of rolling over and slipping under. Nothing was trading, nothing! Tarp got the ball rolling again and bids started to return to the short term high grade markets. However, as you know, the further away you got from triple A and extreme short term the wider the spreads became. Some markets just weren't trading. And still are far from normal. One of those markets was/is the spead muni market. Tell me, how is that Fielding's fault? 
 
You trust a muni manager to make good calls. 
 
And you trust them to stick with the fund's investment objective. Which they did. Many other fund mangers did not. Fielding, who by the way was not running the fund on a day to day basis when all this took place, is to be commended for sticking to his high income objective.
 
The fund's objective was to provide a high income "while using our significant experience researching issuers, creditworthiness and security structures in search of good values to provide a high level of income and to minimize the threats of default and principal decline"  They failed their own objective. 
 
Today the non accrual rate (bonds in default or headed there) on the ORNAX fund  is lower than it was when Morning Star and Lipper had the fund rated #1. So what failure in defaults are you talking about?
 
As for principal decline , as you said "using our signifcant experience." What experience would that be? There is no experience to cover what happened. What happened was a first.
 
And we're not done yet. Who knows what the future holds. The only losers are those who have sold. And why would they sell? Fear? Bad advice from the total return sell by the chart crowd telling them they need to lock in their losses and take a lot less income?? Shareholders in these funds, in particular the ORNAX fund signed up for high income. Today that fund returns the highest income of any muni fund. Again, what failure?
 
Franklin NY tax free on the other hand was only a tick behing in total return in the 90's and early 2000's, but it held up REALLY well in the last two years.... 
 
I note the term total return in your post. Not even close to what Fielding was doing. The ORNAX fund's performance can be directly tied to Fielding's refusal to cave into pressure to shorten up and upgrade the fund's portfolio in the face of total collapse of the fund's primary market place. Few managers would have stuck it out. To me the guy's a hero. he didn't sell out the shareholders.
 
As we agree, our opinions differ.
 

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SometimesNowhere wrote:What a great thread!BG, are you selling CA bonds to clients?Or maybe I should ask it this way...are you avoiding CA bonds? Why or why not?(Anyone else can answer, I just have a mancrush on BG)
 
Yes, i see opportunity in California bonds. I rely on our research and the fact that our trading desks are pretty careful. There are issues they won't touch. That's a primary filter. If it's in inventory it passed the first test. From there, i can call our desks and talk to the trading heads or the traders and get more info.

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BondGuy wrote: Individual bonds come with a maturity date. Regardless of what happens in the market the client gets their money back on that date.
Individual bonds are pure income instruments. No muss no fuss, just income generating machines unencumbered by fees. you get exactly what you sign up for.
 
Individual bonds are not subject to change. There are no surprise notices that the manager, to accomodate new shareholders, or through some other market blunder, has to cut the dividend.
 
Individual bonds are not subject to management f*** ups. Ok, the managers guess wrong on that big position and now the fund is down 10% with no way to get that money back.
 
Individual bonds aren't sold at the whim of an investment manager who sees his career passing before his eyes. The manager was long, lost money, and now needs to get short, he does so locking the loss and killing the income. This has happened more times than i can count.
 
Most bond funds are now managed for total return. This is done because most funds are sold as part of a fee driven asset allocation program. Because income generation is a secondary consideration for the fund's managers income projection for retirement planning is impossible.
 
UIts charge managment fees for putting together a ready made portfolio of bonds. The fees can negate most of the price advantages, if any, the managers may have received through their buying power or expertise. As well, one must carefully and fully understand all the call features of every bond in the portfolio, the relationship those calls have to the purchase price of the bonds, and that relationship to the current price of the UIT. It's possible to lose a lot of money through any misunderstanding of those relationships.
 
All that said, do i use bond funds? Yes, mostly for high yield bonds where it's safer to buy a fund than an individual bond. Also, for clients lesser amounts to invest and finally where there is a clear price/yield advantage.

amen brother.
and....

like everything in our biz...no free lunch

If you look on bond screen for highest yield or you see a bond that "looks really great" .......your gonna get fukced.

traders, bond desk, institutions etc hold the cards in this game. We (retail) dont know crap.   
we are bottom of food chain.
call features, real terms on bond etc are tricky
(school of hard knocks)
   
keep it simple and remember what your after. there are trade offs. if you think your tricking someone with a incredible bond.....you aint

I'm humble in this game.

(unless your name is bond guy and this is your main gig. you can get the expertise and know the research if thats your deal)

our team manages portfolios and we look at the fix income part as a necessary evil.   

we buy govies, safe boring simple munis. keep it between the ditches.

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mlgone wrote:

isnt' that the nature of buy "bonds"?

says a janitor...

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BondGuy, you continue to amaze me with your threads of wisdom.  I feel like I'm playing catch-up here.
That being said, I admit I had too much ORNAX on the books, stretching for yield when spreads dictated I shouldn't have, lesson learned.  However, I did double down for most of my clients after the disasterous 2008 year, and those clients that listened are nearly made whole.  Trust me, when spreads for high yield muni's dip below around  250-280 BP's from AAA's, I'm pulling the trigger and moving up the quality spectrum and shortening my maturities a smidge. (high yield muni's still a great buy in my opinion).
 
I think CA bonds are a great buy.  In the BAB's as well.  Sick yields on school district, sewer, water, and other GO's.  You can't open new accounts with them easily, in fact I only recommend them to seasoned clients that trust me, because too many people have been watching CNBC.
 
ST,  I would suggest that the last 2 years has shown us the retail investor has much more clout what you might think.  You may not get the best pricing, but there was a period of many months that hedge funds/mutual funds were dumping some of the tastiest muni's at the most rediculous yields I have ever seen.  The only thing proping up the muni market at the time was retail, as the ARS were frozen and institutions were dumping bonds as redemptions skyrocketed. 
As a side note, Bill Gross has been a great manager, but he also is a propegandist.  Every other year he is calling Dow 3k or 5k or something similar.  I guess scaring money into you fund is another way to garner assets.  I suppose to run the largest bond fund in the world you have to be a perma-bear.....

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rankstocks wrote:  

However, I did double down for most of my clients after the disasterous 2008 year, and those clients that listened are nearly made whole. 

great call.   that's adding value

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mlgone wrote: BondGuy wrote: SometimesNowhere wrote:What a great thread!BG, are you selling CA bonds to clients?Or maybe I should ask it this way...are you avoiding CA bonds? Why or why not?(Anyone else can answer, I just have a mancrush on BG)
 
Yes, i see opportunity in California bonds. I rely on our research and the fact that our trading desks are pretty careful. There are issues they won't touch. That's a primary filter. If it's in inventory it passed the first test. From there, i can call our desks and talk to the trading heads or the traders and get more info. If your buying CA bonds.............your buying high yield.......that's a fact.   Between you an Dan Fuss........I pick Fuss. I trust his credit work a lot more than I do your desk. I would buy NEZYX anyday over your individual CA bonds. BTW you said you use a fund for high yield....CA is high yield........
 
Fuss is a good guy, but his fund- total return.  Not where you want to stick someone counting on a monthly check.
 
Ultimately you should trust his credit work a lot more than my desk or anything you read on the internet. You've got to put your faith in people you believe in.
 

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rankstocks wrote:
 
I think CA bonds are a great buy.  In the BAB's as well.  Sick yields on school district, sewer, water, and other GO's.  You can't open new accounts with them easily, in fact I only recommend them to seasoned clients that trust me, because too many people have been watching CNBC.
 
ST,  I would suggest that the last 2 years has shown us the retail investor has much more clout what you might think.  You may not get the best pricing, but there was a period of many months that hedge funds/mutual funds were dumping some of the tastiest muni's at the most rediculous yields I have ever seen.  The only thing proping up the muni market at the time was retail, as the ARS were frozen and institutions were dumping bonds as redemptions skyrocketed. 
 
 
+1
 
It was a beautiful thing!
 
As for owning too much ORNAX, that was the case for me in August 2008. And unlike you i didn't double down as much as i should have. Nor did i sell. The yields on the regular everyday munis were just too good to pass up. I look at ORNAX as I would look at any long term muni bought for income. It's paying its dividend (coupon) and we'll just hold it. It was never intended to be a trading vehicle or to fill an allocation space. Income will drive the total return into positive territory and eventually it will become a top holding once again. It's already positive for many of my clients. And that income is whew!!!!!!!!

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BondGuy wrote:mlgone wrote: BondGuy wrote: SometimesNowhere wrote:What a great thread!BG, are you selling CA bonds to clients?Or maybe I should ask it this way...are you avoiding CA bonds? Why or why not?(Anyone else can answer, I just have a mancrush on BG)
 
Yes, i see opportunity in California bonds. I rely on our research and the fact that our trading desks are pretty careful. There are issues they won't touch. That's a primary filter. If it's in inventory it passed the first test. From there, i can call our desks and talk to the trading heads or the traders and get more info. If your buying CA bonds.............your buying high yield.......that's a fact.   Between you an Dan Fuss........I pick Fuss. I trust his credit work a lot more than I do your desk. I would buy NEZYX anyday over your individual CA bonds. BTW you said you use a fund for high yield....CA is high yield........
 
Fuss is a good guy, but his fund- total return.  Not where you want to stick someone counting on a monthly check.
 
Ultimately you should trust his credit work a lot more than my desk or anything you read on the internet. You've got to put your faith in people you believe in.
 

Fuss gives you equity-like returns with a little less risk than equities.  But the returns are highly correlated with equities, so I would not use it as part of a bond allocation.  It's really more of a high-yield equity.

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  isnt' that the nature of buying "bonds"? Safety?
 

Only if purchased as part of an asset allocation program. Bonds can be purchased across the risk spectrum. Most asset allocators look at the FI component as a necessary evil, which someone posted, and just want a smooth ride without problems. Essentially, the bonds are purchased less for what they can add to the return and more for getting money off the equity tracks. In that sense the nature of the bonds purchased is safety.
 
For the dedicated bond buyer it can be anything but safety. It can be high income or high total return or short term trading. For example buying Chrysler bonds in the early nineties for 40 to 70 cents on the dollar, collecting a 12% coupon, which was a  17% to 30% current return, holding five years and collecting par when the bonds matured. Home run, nothing safe about it, but not nearly as reckless as it sounds. The same opportunity presented itself last year in Ford and GMAC bonds. And opportunity still exists. So, if you want to give it a try go for it. Only appropriate for certain types of investors.

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BondGuy wrote:  isnt' that the nature of buying "bonds"? Safety?
 

Only if purchased as part of an asset allocation program. Bonds can be purchased across the risk spectrum. Most asset allocators look at the FI component as a necessary evil, which someone posted, and just want a smooth ride without problems. Essentially, the bonds are purchased less for what they can add to the return and more for getting money off the equity tracks. In that sense the nature of the bonds purchased is safety.
 
For the dedicated bond buyer it can be anything but safety. It can be high income or high total return or short term trading. For example buying Chrysler bonds in the early nineties for 40 to 70 cents on the dollar, collecting a 12% coupon, which was a  17% to 30% current return, holding five years and collecting par when the bonds matured. Home run, nothing safe about it, but not nearly as reckless as it sounds. The same opportunity presented itself last year in Ford and GMAC bonds. And opportunity still exists. So, if you want to give it a try go for it. Only appropriate for certain types of investors.

 
what happened in sept-dec 2008 in fixed income will NEVER happen again.    

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good thread

For the jonesies out there, any ideas on how we can play the floating rate market? Unless things have changed in the last few years, we are unable to buy a pure play floating rate fund.

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Close-ended floating rate funds.

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Shania Twain wrote:BondGuy wrote: 

 
what happened in sept-dec 2008 in fixed income will NEVER happen again.    
 
For the sake of us all I hope you are right. Still, Shania, sweetheart, you miss the point. The point is FINDING opportunity in the bond markets. Then using that opportunity to add value to clients. Not a small thing in the cookie cutter off the rack world that the investment advice biz has become. That opportunity is there. Do you want to add value?

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rankstocks wrote:Close-ended floating rate funds.

 
I've been buying up the First Trust Senior Loan fund which is made up of floating rate CEF's.  It looks like we're in the first couple innings of this game, wouldn't be a bad thing to cold call on.
 
Edit:  Thought about it for a minute.  Here's how I would cold call on it.  "What is your advisor doing to protect your bond positions from rising interest rates?  Would you find it worth 15 minutes of your time to learn how rising interest rates can decrease the value of your bonds and how you can also take advantage of this opportunity?"
 
Something to that effect.  Not perfect, but may get people thinking.

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BondGuy wrote: Shania Twain wrote:BondGuy wrote: 

 
what happened in sept-dec 2008 in fixed income will NEVER happen again.    
 
For the sake of us all I hope you are right. Still, Shania, sweetheart, you miss the point. The point is FINDING opportunity in the bond markets. Then using that opportunity to add value to clients. Not a small thing in the cookie cutter off the rack world that the investment advice biz has become. That opportunity is there. Do you want to add value?

understand.

But you must know your sh#t (like it sounds like you do).

I think retail punks like me who are not buying size and do not not have the research and insights are at a huge disadvantage to the trader whor*es, the bond desk whor*es, the real players (mutual funds, calpers etc etc) etc etc.

PLUS, the new horrible angle of the GD liquidity going bye bye.

If you HAD to sell bonds during that meltdown period in 08 you were screwed.   that was NOT a market.   their normal screw job spreads went to insanity.    the bid-ask was a joke. it was not a market   

its like gambling in vegas. you will not win.

You said it in one of your posts. fixed income to me is a necessary evil. a risk reducing parking place.

I guess Ive been f#cked enuf times where I am humble to not try to beat them at THEIR game.   I buy stocks to make money and I understand the risk.   

I just dont want to buy GM,fre,ene,fnm,dec,leh etc etc etc for 150 basis points going in.   

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 I'm talking to opportunity side of things here not the mechanics of how the markets work. Traders giving the old KY treatment is nothing new. And has always been a complaint coming from retail. However, the fall of 2008 was a new world for retail. Institutional was selling and in the absence of bids prices were hitting new lows every day. The only buyers of bonds in that market was retail. Now we've come full cycle in many credit markets. Advisors who bought bonds for their clients in that 08 market are looking like geniuses right now. It's the same old story; while most people run from the flames other run towards them. It is those individuals who are the heros.
 
It takes big balls (sorry ladies) to step up in a situation like that. But if you want to add value, that's the deal. Otherwise you are just a me too adviser giving clients products, services, and advice they can get anywhere.
 
And here's the thing with this; many of you will think that what i did or what Ranks did was reckless or only for high risk clients. No no no! It was for everybody. The risk wasn't that great. Why? Because we weren't having a credit crisis, we were having a liquidity crisis. As Shania pointed out you couldn't get a bid. But the credits were still good. Back here on main street the lights were still on, the trash was getting picked up, you know, people were still paying their property taxes , business as usual. The fact is the only way these bonds wouldn't pay off is if we had a total economic collapse. If we were headed for total economic collapse it wouldn't have mattered where your money was invested. Or even if it was invested. Money would be worthless to the point of being better used as insulation for your house than as legal tender. So exactly what risk were we taking?
 
Lastly, here we go again with California. S&P lowered them to A- today. Talking the GOs here nothin' else. Ok lets look at this
1. No state can go Chapter 9 on their bond debt. It's not legally possible.
2. By constitution California must pay the debt on its bonds second only to paying for education. That puts bond holders at number two on the payee list. I  like being #2 !
3. By constitution, California like every state, must balance its budget every year.
 
What does this mean?
 
Unless California plans to not exist past June of this year they've got to balance their budget. By constitution the bondholders get paid before the state workers get paid. It's gonna be tough running the state without any workers. As it will be running the state without the ability to pay anyone for anything. Still, the kids go to school and the bondholders get paid.
 
In practical terms this means California will find a way to balance its budget. And they will do whatever is necessary to maintain their ability to borrow. Because, again, unless they are going the way of the dinosaur they are going to need that ability.
 
Now, I gotta tell ya Calfornia's situation is different than the one i described up above about last year. California's situation is a credit crisis. A credit crisis caused by a lack of liquidity. That's serious stuff. And not a risk all clients should take.
 
Knowing all that you have to ask yourself a question: Run towards the flames or away from them? Only you can answer that for yourself.
 
 

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small guy sold in fear in march

afraid of stocks

cant deal with .3873827387213812732173821% cash
buying bonds now (safer then stocks logic-duh)

this guy gonna get killed.
short-interm end

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I've been following this thread and several others on this blog. I want to thank you all for your comments. I've learned a lot here and I'm very impressed with your knowledge. I noticed a few of you that I have had run-ins with. Sorry about that. I've had a couple of health issues that make me grumpy. The thing I like most about this business is how mentally stimulating it is. What I like least is prospecting. You all have helped me with both. Thanks!

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