Munis

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Gordon Gekko's picture
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Joined: 2007-07-08

I see they got throttled again today. My assumption when I see that is "oh, another hedge fund selling" but at some point you gotta give me a break!  Anything that I am missing?

YHWY's picture
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Joined: 2007-07-18

Are we headed for massive muni defaults? At this point anything's possible. My guess (and money) is that the answer's no (on high-quality, which are additionally insured, issues). At this point, though......what would really, really shock you??

Hank Moody's picture
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Joined: 2008-11-10

YHWY wrote:Are we headed for massive muni defaults? At this point anything's possible. My guess (and money) is that the answer's no (on high-quality, which are additionally insured, issues). At this point, though......what would really, really shock you??
Do you tell your clients about the "inherent risk of default" of the insurers?

YHWY's picture
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Joined: 2007-07-18

ABSOLUTELY!

YHWY's picture
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Joined: 2007-07-18

In fact, hank, the scenario I always use is, "If the City, County and State of NY went bankrupt, do you honestly think MBIA (or whichever insurer) could cover that obligation?"It makes a couple points simultaneously.

Hank Moody's picture
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Joined: 2008-11-10

YHWY wrote:In fact, hank, the scenario I always use is, "If the City, County and State of NY went bankrupt, do you honestly think MBIA (or whichever insurer) could cover that obligation?"It makes a couple points simultaneously.
It means that the only time that you would need the insurance, it won't be there. Also, since the insurance won't cover you, you're a sucker if you forgo a higher rate in order to fall for the insurance gimmick. Are those the points that you were thinking of?

YHWY's picture
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Joined: 2007-07-18

The points are that if the client really believes that a highly rated muni from the city, county or state of NY carries a legitimate default risk, that A) Yes, the insurance probably won't be there and B) If you really don't believe that there's a legitimate default risk, that we may, in fact want to choose a highly rated non-insured bond for a hiugher yield C) That if they do believe there is legitimate default risk and just want the insurance to "feel better" that that isn't a realistic point of view (as my scenario illustrated) and D) If they honestly believe that the risk of default of both the municipality and insurer, then we need to be looking for a more conservative investment for him or her. I know having investment alternatives flies in the face of everything you believe, but there you have it.

Hank Moody's picture
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Joined: 2008-11-10

YHWY wrote:The points are that if the client really believes that a highly rated muni from the city, county or state of NY carries a legitimate default risk, that A) Yes, the insurance probably won't be there and B) If you really don't believe that there's a legitimate default risk, that we may, in fact want to choose a highly rated non-insured bond for a hiugher yield C) That if they do believe there is legitimate default risk and just want the insurance to "feel better" that that isn't a realistic point of view (as my scenario illustrated) and D) If they honestly believe that the risk of default of both the municipality and insurer, then we need to be looking for a more conservative investment for him or her. I know having investment alternatives flies in the face of everything you believe, but there you have it.
I own you, broker010.

YHWY's picture
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Joined: 2007-07-18

Give me a fucking break, Bobby. Go sell an annuity or start a Regrep forum or something. You are making a fool of yourself here. Your retort is EXACTLY par for the course when you've been hammered. Call a name, type nonsense or say "none of your business". You have no knowledge, just sales ability, good for you. Bad for your clients.

Chuck's picture
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Joined: 2007-06-22

default rate for AAA munis over the past 10 years is >1%

YHWY's picture
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Joined: 2007-07-18

Greater than 1% or Less than 1%?

Chuck's picture
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Joined: 2007-06-22

Less than 1%...

YHWY's picture
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Joined: 2007-07-18

Oh, and Bobby, if you'd like to discuss your "ownership" claim further, I'm happy to give you my name, address and phone number so we can discuss it in more detail.

Gordon Gekko's picture
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Joined: 2007-07-08

People sure are testy these days! Maybe it has something to do with equities off 50% in a year and nothing working other than cash. This too will pass (the market correction, not brokers getting chippy).

YHWY's picture
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Joined: 2007-07-18

Guilty as charged, obviously. Man, GG, you couldn't have picked a more innocuous topic.....one would have thought. 

albert's picture
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Joined: 2008-11-04

I have been comfortable buying Quality school and sewer types.  I do not expect to have credit problems but sure do look more carefully at the issues before buying them. Yields are very good and brackets will rise in the future and you will like them even more. If we have problems with these going forward then things went from very bad to worse. Also, not afraid of a little duration here.

Gordon Gekko's picture
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Joined: 2007-07-08

I think I could start a thread called "Thanksgiving" and within minutes the indy and wirehouse guys would be at each others' throats.
 
Went to a lunch a few weeks ago from MFS. Story was the same as the Eaton Vance lunch I went to back in March - defaults are low, values are huge relative to Treasuries, etc. At some point, I hope they are right. The EV manager said he would be disappointed if he did less that 10% total return this year. I haven't looked lately but I would guess he is down about 20%. Thanks credit crisis!

YHWY's picture
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Joined: 2007-07-18

I still strongly believe there's value in the muni market. I've been using them quite a bit over the past few months. I've always thought that municipalities (for the most part) represent one off the more stable issuers of any bonds, just by nature of their structures. Obviously, specific revenue bonds tied to stand-alone projects can be more dicey.

Chuck's picture
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Joined: 2007-06-22

I love GO bonds... two things we can count on; death and taxes...

ezmoney's picture
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Joined: 2004-11-30

try .001% for high yield munis, the default rate for single A and higher is nil. Give me a break , two years from now we'll be heros for putting our clients in munis.

Chuck's picture
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Joined: 2007-06-22

yeah, and when all these 6% munis get called and all that is out there is 4% they'll love that...

YHWY's picture
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Joined: 2007-07-18

Chuck wrote:two things we can count on; death and taxes... One day, I plan to use one to avoid the other. Now THERE'S a financial plan!

Chuck's picture
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Joined: 2007-06-22

wow, you must be a CFP

mnbondguy's picture
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Joined: 2008-05-13

Munis were off 6 or 7bps today.  Assured and FSA got downgraded to AA2 by moodys and the evals on bonds insured by them dropped 20pts in some cases.  The pricing services are a little whacky, the actual bonds didn't drop that much. I expect you will see evals adjust.

Sportsfreakbob's picture
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Joined: 2008-08-24

Does anyone here think that a couple of years from now inflation will be way higher?There is no pressure on prices now because of lack of demand. But as the economy ultimately gets stronger and demand rises, at the same time that the treasury is printing money to pay for all this shit we are going thru now, seems to me that inflation will be a big problem. Whih makes me a bit nervous about going out 10 -15 years to snag 4 1/2 to 5%

Chuck's picture
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Joined: 2007-06-22

but what is the tax equivalent yield on that 5% for your clients in high tax brackets...7.5, 8%, that will definately keep you above inflation.

YHWY's picture
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Joined: 2007-07-18

I think @15 yr. "A" or better munis (non-AMT, WITH insurance, such that it is) are yielding more like 5.25-5.65%, that's not an insignificant tax-free difference.  More to your point, it may take several to many years for the economy to begin to heat up enough to cause inflation, in which case, you may be a good bit of the way to maturity or a call date, which would limit your price volatility. I think you skin that cat when you get to it.

ytrewq's picture
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Joined: 2008-08-02

Default stats are a bit misleading...Those default rates are when the bonds WERE rated AAA/AA/A.  It does not count the bonds that were first downgraded to a lower rating and then defaulted.  Don't get me wrong, I am not predicting muni default problems.  Predicting the opposite.  Just giving out information.IMHO, in most times (these are not most times), the bond insurance provides more than just default protection.  It "can" provide better pricing and liquidity because it is a "safer" bond.  I know, I know, if you have a seat belt and an airbag, a helmet does not really make you safer in a car wreck.....but it kind of does.

YHWY's picture
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Joined: 2007-07-18

ytreg, I agree with your assessment of muni bond insurance, for this reason also: If, for example, a AA, by S&P (for example), issue seeks out and buys insurance, then, not only have the books and/or plan been analyzed by the rating agency(ies), but also by the insurance company who then (as you said, in normal times) has a vested interest in the issue not defaulting. At the very least, the issue has gone through one additional round of "vetting' and analysis.

ytrewq's picture
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Joined: 2008-08-02

Good point YHWY.  Question?  Correct me if wrong but I believe that no organization can legally issue any municipal bonds if they already have another issue in default?  ie they must pay off the old bond before issuing new ones.  They cannot just "go bankrupt" and start over.  Anyone know the answer?  Also, big news now is that municipal ratings are essentially based on the same criteria as corporate ratings.  Supposedly industry is working on new ratings so that munis are rated based on the fact that they are safer and have less defaults than corps...Anyone heard about this?  I am an equity guy but these tf bond yields are insane.  10% Tax Equivilant.  Other than reinvestment rate why buy stocks?

RiverPlate's picture
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Joined: 2008-11-25

You may know this already, but the mkt gives us an estimate of what it thinks inflation will be.
 
I= yield of the treasury - yield of tip so for the 10 years to come:
I= 3.56 - 2.5 = 1.1%
Pretty mild.

deekay's picture
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Joined: 2007-05-15

You all realize inflation is a made-up number by the government so that we don't freak out about how much prices really go up by, right?  Or are you still relying on 80-page computer printout "financial plans" to give advice?

RiverPlate's picture
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Joined: 2008-11-25

All the more reason to trust the mkt and not the gov't

Gordon Gekko's picture
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Joined: 2007-07-08

there was a Pimco/California cef that was down 25% today because they suspended the divy. One more reason to stick with the individual bonds or the open end version.  However, if that discount gets to be 40% or so, it might be a buy (but probably not for me).

Chuck's picture
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Joined: 2007-06-22

sold a ton of a TX tf this wk that was selling at 93 with a coupon of 5.625 yielding 6% callable anytime at par with a premium call of 104 in 2018.  my clients getting a killer tf rate and raking it in if it gets called.... Aaa rated also.... these opportunities won't last for long.

ezmoney's picture
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Joined: 2004-11-30

how about good ole ornax (11% yield). have about 1mill in that fund. getting slaughtered. though I know it will come back in a huge way

Gordon Gekko's picture
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Joined: 2007-07-08

Oppenheimer is like Kevin Bacon at the end of "Animal House" right before he gets stampeded - all is well, no need to panic! The tag line for that fund should be "all the volatility of a cef in an open ended fund".
 
I own the pig myself.

2wheeledbeemer's picture
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Joined: 2008-10-10

Gordon Gekko wrote:Oppenheimer is like Kevin Bacon at the end of "Animal House" right before he gets stampeded - all is well, no need to panic! The tag line for that fund should be "all the volatility of a cef in an open ended fund".
 
I own the pig myself.
 
Just think, 40 million consumers will get up at 3am tomorrow to buy stuff half off...we've been doing that with Oppy muni from the convenience of our comfy offices, and getting paid a 293% yield at the same time.   Good times, good times.....

Gordon Gekko's picture
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Joined: 2007-07-08

When a fund is "on sale" for over a year, you have to wonder if they have more problems than they let on to. They claim they are seeing net inflows which is hard to believe.

ezmoney's picture
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Joined: 2004-11-30

at this point with a cost basis of 10.70 for my personal money, about 100k. I have no other choice but to take the nice tax free income and hope for it to get better. It will.

Gordon Gekko's picture
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Joined: 2007-07-08

Sounds like every closed end fund I've ever bought other than ETJ.

bondking's picture
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Joined: 2008-10-28

just a little 'value added' for anyone doing muni bond business.  in this type of low interest rate environment, experienced bond buyers want to know the vulnerability of the bonds mkt price if/ when rates make an upward move.  the duration of the bond (not the # of years until maturity) is an excellent predictor of how many bps or percentage points a bond will move if interest rates make a 100 basis point move.  obviously, you would adjust the equation accordingly, as most int. rate moves are between 25-50 bps. 
you don't have to be a CFA to interpret duration.  you don't need to get into convexity, and other hyper-analytical discussions, but the durantion # is VERY relevant, easy to explain, and experienced bond buyers will give you all their business if they know that you are managing their price sensitivity as well as all the other components.    
 
 
 

Borker Boy's picture
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Joined: 2006-12-09

What would you recommend as a good source for bond-related information?

Bud  Fox's picture
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Joined: 2008-07-20

The trade confirm you will get after buying a bond from me.

HymanRoth's picture
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Joined: 2008-08-25

Gordon Gekko wrote:When a fund is "on sale" for over a year, you have to wonder if they have more problems than they let on to. They claim they are seeing net inflows which is hard to believe. Stop whining and take the tax loss then....creates more opportunities for those of us who have a long term view and an understanding of the markets.....

YHWY's picture
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Joined: 2007-07-18

Hyman, You seem to be a little too ready to be a prick. Just an observation.P.S. One with any understanding of the markets knows that whether or not GG sells his shares of any open-end funds neither creates nor destroys any opportunity for anyone.

bondking's picture
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Joined: 2008-10-28

Borker Boy wrote:What would you recommend as a good source for bond-related information?
 
other FA's in your office that do lots of bond business are a great source to tap for bond information. other great sources:
 
a. your companies fixed income site
b. your muni trading desk (when trader has time). 
           * traders speak a language not always understood by the average broker/ client.  ask them what they are talking about, and don't get intimidated.  to reference my previous post, the real experienced bond buyer clients DO understand that rhetoric.  learn it
c. gooooooogle
 
 
 

HymanRoth's picture
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Joined: 2008-08-25

YHWY wrote:Hyman, You seem to be a little too ready to be a prick. Just an observation.P.S. One with any understanding of the markets knows that whether or not GG sells his shares of any open-end funds neither creates nor destroys any opportunity for anyone.
You are indeed entitled to your opinion.  Perhaps I could have found a more constructive way to express myself.Having said that, if people are selling open end funds and forcing said funds to sell to raise cash, wouldn't that push down prices and create opportunities if it is happening in sufficient quantity?  Isn't that exactly what is happening right now, at least to some extent?

bondking's picture
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Joined: 2008-10-28

open-ended fund share prices reflect the value of the fund's holdings, not supply vs. demand, which dictate the price of common stock (if more buyers show up than sellers, stock goes up.....blah blah blah).  what has been happening right now, to a severe extent, has been program trades. 

HymanRoth's picture
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Joined: 2008-08-25

HymanRoth wrote:
YHWY wrote:Hyman, You seem to be a little too ready to be a prick. Just an observation.P.S. One with any understanding of the markets knows that whether or not GG sells his shares of any open-end funds neither creates nor destroys any opportunity for anyone.
You are indeed entitled to your opinion.  Perhaps I could have found a more constructive way to express myself.Having said that, if people are selling open end funds and forcing said funds to sell to raise cash, wouldn't that push down prices and create opportunities if it is happening in sufficient quantity?  Isn't that exactly what is happening right now, at least to some extent?Perhaps I should have been more clear...doesn't the selling to meet redemptions create downward pressure on the price of the underlying securities, which would in this case be muni bonds?

YHWY's picture
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Joined: 2007-07-18

Hyman, When one open-end fund owner sells his shares of the fund, no, there are no actual (in this case) muni bonds changing hands.  

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