Munis
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Another day, another 1% plus piddled away. I’ve been throwing a little money at the Evergreen (I know, Wachovia owns them) Strat Muni fund. The manager keeps the duration so short that it doesn’t get whacked on days/weeks/months like we’ve had lately.
A sinking fund is used when term bonds are created. Municipalities usually prefer a level debt service, but insititutional investers like large maturities, so to solve the problem, they roll several years into one maturity and use a sinking fund to pay off a set amount of prinicpal each year after the sink starts. Only escrowed or prerefunded sinking fund bonds would be backed by treasuries, not all sinking fund bonds.
mnbondguy - Good corrections to those who have not a clue about muni bonds.
Yeah, let's look for bonds w/ sinkers to get that 'treasury qaulity' and let's stay away from tobacco bonds to reduce our amt exposure. C'mon folks -learn your bonds or stick w/ your funds. To those that own ORNAX, I remember that fund. I recall that they owned alot of airline debt as well as TOB's. I don't know if that changed but could be a contributor to the underperformance. Also heard about a tender offer on SC 6 3/8 due in '30 for anyone who cares. The issuer wants to buy bonds back - check w/ your trading desk for the December 2nd notice. I like having a muni thread - let's keep it going.[quote=dizzy]
mnbondguy - Good corrections to those who have not a clue about muni bonds.
Yeah, let's look for bonds w/ sinkers to get that 'treasury qaulity' and let's stay away from tobacco bonds to reduce our amt exposure. C'mon folks -learn your bonds or stick w/ your funds. To those that own ORNAX, I remember that fund. I recall that they owned alot of airline debt as well as TOB's. I don't know if that changed but could be a contributor to the underperformance. Also heard about a tender offer on SC 6 3/8 due in '30 for anyone who cares. The issuer wants to buy bonds back - check w/ your trading desk for the December 2nd notice. I like having a muni thread - let's keep it going. [/quote] Not sure what is worse, my spelling or my typing...Problem with ornax is that it is a high yield fund...with the downgrade of the bond insurers, the supply of yieldy muni's has exploded. Add this to the fact that mutual funds are seeing outflows, insurance companies are running low on capital, the arb buyers can't buy because they are deleveraging and that there is a real risk of more downgrades, increasing defaults and a very illiquid market, ORNAX could go lower. Pricing services (who effectively determine NAV) are having a hard time putting a price on a lot of lower rated bonds currently, there are few bidders. There is also a record number of new issue muni's trying to come to market in the next 60 days, so I would be surprised if we see a big improvement in the market any time soon. If 3% long ust's cant bring a bid back to the muni market, what can??Simply NO confidence that this housing crisis will improve leading to lower RE taxes and REV for all munis. Treasuries have no relavance at the moment.
whalehunter, i'm missing your point regarding lower taxes and revenue for all munis during a housing crisis. could you explain? Also, treasuries are extremely relevant now. These historical spreads are creating some of the best corporate opportunites in a long time (GE, CAT, etc) no?
[quote=bondking]
whalehunter, i'm missing your point regarding lower taxes and revenue for all munis during a housing crisis. could you explain? Also, treasuries are extremely relevant now. These historical spreads are creating some of the best corporate opportunites in a long time (GE, CAT, etc) no?
[/quote] Whalehunter is referring to the fact that municipalities cash flows will be impacted by a lower taxable valuation. This lowers debt service coverage ratios on bonds directly backed by ad valorem property taxes. Lower sales taxes, lower gasoline consumption and lower income taxes at the state/city level all affect coverage and the overall ability to balance a budget. Also, who cares about spread to Treasury? That has significantly helped me sell a bond anyway. My clients don't seem to care.[quote=dizzy][quote=bondking]
whalehunter, i'm missing your point regarding lower taxes and revenue for all munis during a housing crisis. could you explain? Also, treasuries are extremely relevant now. These historical spreads are creating some of the best corporate opportunites in a long time (GE, CAT, etc) no?
[/quote] Whalehunter is referring to the fact that municipalities cash flows will be impacted by a lower taxable valuation. This lowers debt service coverage ratios on bonds directly backed by ad valorem property taxes. Lower sales taxes, lower gasoline consumption and lower income taxes at the state/city level all affect coverage and the overall ability to balance a budget. Also, who cares about spread to Treasury? That has significantly helped me sell a bond anyway. My clients don't seem to care.[/quote] Thx Dizzy, as a salesman I tend to be short winded LOL There is no relationship between treasury yields and munis. Treasuries are the safe haven at the moment.Typo correction to my previous post:
Treas/Muni spread has never really helped me sell a bond. My clients don't care.^^^thanks. i knew what you were getting at
i should've been more clear in my previous post. i was referring the treasury/ corporate spread, not the muni spread. the trea/corp spread is VERY helpful in this mktno and yes. sorry, can't think of a better way to answer. for munis, i'm in a low supply state. this is a unique time for some of these 10 year corp issues. i'm loving this yield, and yes, if it works for my client, i would definitely position some of this stuff in taxable accts. of course, quality is king in here, but anyone would be a fool not to consider the rare opportunities for corporates over munis right now. it ain't gonna last.
Mnbondguy:
I have been in Investments with a Series 7 (plus about 4 more licenses) since 1998; 7 years of which is just Fixed Income Trading. I asked a dealer who just underwrites munis about what you said about sinking funds. His response was that if the sinking fund was placed in anything other than a T-bond; he's never seen it. (The dealer has been in the biz for about 25 years.) He also said something to the fact that an accountant for a municipality would need it to be in a security like a T-bond on their balance sheet. I tried googling the answer and didn't find anything on any reliable sites. If I am wrong; I definately want to know. That being said: Where did you get your information?[quote=lady_trader]Mnbondguy:
I have been in Investments with a Series 7 (plus about 4 more licenses) since 1998; 7 years of which is just Fixed Income Trading. I asked a dealer who just underwrites munis about what you said about sinking funds. His response was that if the sinking fund was placed in anything other than a T-bond; he's never seen it. (The dealer has been in the biz for about 25 years.) He also said something to the fact that an accountant for a municipality would need it to be in a security like a T-bond on their balance sheet. I tried googling the answer and didn't find anything on any reliable sites. If I am wrong; I definately want to know. That being said: Where did you get your information?[/quote] you are confusing escrowed/prereed bonds with sinking fund bonds, they are two completely different definitions. Bonds with sinking funds can or cannot be prereed, usually (not always), when a bond is prereed, it is done to the first call, which is before the sinking fund even starts, so the sinker is irrelevant. Prereed or escrowed bonds are usually escrowed with ust's, usually in the form of slugs, but there are a small percentage escrowed with agency collateral, a few very old deals escrowed with G.I.C's, and I have even seen a deal that the univ of mn escrowed with AAA muni's, (doubt they are still AAA). Accountants for a municipality would have nothing to do with maintianing the escrow account, the escrow agent would. Escrow agent is usually a trust dept from a large bank. Once the monies are depositied in the account, usually slugs are purchased, the escrow agent and attorneys verify it is sufficient to pay the principal and interest on the refunded bonds. The munipality now only pays on the new issue, the "refunding" bonds. I got my info by selling billions, yes billions of $$'s of bonds over the last 20+ years. Hope this helps. Slugs = State and Local Government Securities. The treasury created these after the yield burning scandal years ago to help municipalities create escrow accounts with out the worry of creating an improper arbitrage.Another WTF day in muniland! I am getting another check for an existing shareholder and the pucker factor will be high when buying more munis.
Need to be careful these days but yields are higher than they should be. I spend more time looking bonds over before I buy them. At AGE you had the sense that bonds in inventory were vetted to a degree. At Wachovia and their ebay platform you see it all and had better be careful. I preferred the friendly confines of AGE.
Listened in on the conference call today for ORNAX. Managers haven’t seen anything like this for the 30 years they have been around. Average muni in ORNAX trading at about 50 cents on the dollar. 98.4% of bonds paying like they are supposed to. 1.6% of bonds in some form of default, and of those, there average recoup is 60% historically. They haven’t had a net redemption on the fund this year, as dividend reinvestment and inflows have covered the panic selling. They made a compelling case that now was the time to back the truck up.
Good to hear I guess but would they ever tell us that it wasn’t the time to be buying?