AttorneyMother, you worked on deals and you are asking me?
You are right. The rates are paltry. Muni bonds are not liquid. There is interest rate risk and inflation risk.
Generally, I donât love munis right now. I am not adding munis to my portfolio. Some bonds were called away and so all I did was take some of that money and buy some muni bonds.
So bonds that were yielding 4.5 percent and 5 percent were called away (another risk) and I replaced those with bonds yielding 3.5 and 3.73 percent. I ddnât do this on purpose. Rates have dropped. My income dropped.
SoâŠwhy buy these? I donât see taxable bonds or notes, with 10-15 year maturities, with after tax yields that are materially better. I also have to keep my broker happy because someday he may get something that is actually good.
I like to buy individual bonds because over timeâŠinterest rate risk declines. I expect to hold these until maturity. In California, I like to buy Mello-Roos bonds. Property owners pay a special property tax, added to their regular property tax, to pay the interest and principal. The bonds are usually unrated which keeps some institutions from buying them and this raises the yields. Default risk is extremely low. We had a housing collapse that was unprecedented in our lifetimes and I am unaware of any defaults. Maybe there was in Stockton. I donât know.
Other states and localities may differ in bond offerings. I just buy California and local area bonds.
Yup, I did. Then quickly moved on. So, other than knowing that munis are exempt from taxation, reading endless pages of reps and warranties by the borrower and knowing the foreclosure provisions, I paid little attention to munis as investment securities. I had little money then to invest and worried more about the interest rate on home mortgages.
Itâs good to know that there have been no defaults of which you are aware, even in the recent collapse. Owning individual bonds sounds like more research than Iâm willing to do and I donât trade with a broker. I may look at muni bond funds. Long ago, I had some money with Dreyfus muni funds but got rid of those because we were too young to be that conservative. Itâs a bit different now.
What maturity do you recommend so that Iâm not looking at rock bottom returns?
With the strong dollar and rates being cut overseas I would be surprised if there were rate hikes
See that is why I buy index funds and just hold them. I was talking to someone this morning about the dollar taking off. Now I check and it says the stock market was up because the dollar was weaker.
So is the dollar going to gain strength against other currencies and if so can the Fed raise rates? Is a strong dollar good or bad?
Iâve been looking back pages and pages - my eyes are glazing over. Would someone be kind enough to repost the âMaximize your Social Securityâ software that Attorneymother and others have linked to?
Thank you.
AttorneyMother, Well it depends.
You are probably going to be looking at maturities at least 5-7 years out to get returns close to the inflation rate.
MUB is an etf⊠MUB is yielding around 2.7 percent. The fund has a duration of about 6.7 years so the etf should act like a bond that matures in 6.7 years. An interest rate rise of 1 percent should decrease the value of the fund by the duration rate or 6.7 percent. However, I look at the holdings and see bonds in the etf that donât expire for 20 years.
HmmmmâŠ
Puerto Rico has financial issues. A lot of funds have Puerto Rico bonds in their portfolios because the yields on the Puerto Rico bonds are quite high. Maybe the yields are high enough to cover the risk. I donât know but I donât buy munis because I want to take risk.
If you look at MUBâs chart of the last 5 years and can see a couple of pretty good drops. The last time MUB dropped quite a bit is when interest rates spiked. If you lose 10 percent in a fund when you are trying to make 2.7 percent a year, that it isnât fun. (Hopefully, you donât have to sell).
Watch out for bonds that are subject to the AMT. Try to see if a fund invests in bonds that are subject to AMT. If the funds do and you pay the AMT, some of your interest is taxable.
I do not know what happens when an investor buys munis or funds in a different state than they live in and what the tax ramifications are. You may be subject to state income taxes. Donât know.
Well, donât forget TIPS if you are worried about inflation. They were once a real bargain, but are not so much anymore, but if youâre worried about âunexpected inflation,â they work quite well. Taxation on them is diabolical though; you are paying taxes on gains you donât receive until they mature.
I made good money on them years ago, but I no longer buy them.
I-Bonds are a great place to store your emergency fund and at least a portion of your assets are inflation hedged. Youâre limited to $10k/person/year in I-Bonds, unless you have engineered an income tax refund, in which case you can take your refund in I-Bonds. I think the total limit is $20k/person/year, but check â we never get refunds naturally and havenât bothered engineering one, so Iâm not sure of the annual limit on refund-based purchases.
From what I have read, which isnât that much so far, Kotlikoff addresses some complex SS factual situations that arenât typically encountered unless you have complex situations such as previous marriages, widowhood, disabled family members, etc. Thatâs where his book / software may be most useful.
Perhaps for simpler situations, this type of evaluator by T. Rowe Price may be a good starting point:
We get a lot of ads these days for seminars ⊠âto help plan SS, avoid missing out on $100Kâ yada yada. But some of their analysis seems to do with hindsight comparisons, AFTER life span is known. Even that is worth analyzing though, so you understand the break even points for drawing SS at different ages. The SS online calculator is a good place to start.
Thank you for posting the information. Itâll get me started. I live in a non-income tax state, so thatâs not a problem. Fed income taxes are maxed out but I do have to be aware of the AMT. Iâll start with muni funds with the maturity range you suggest. I just want good paper that attempts to keep up with inflation.
@IxnayBobâ
I will look into T-bills also. Thank you for the reminder.
@dstark, those are negative real yields. TIPS should be thought of as more like insurance than a bond, sort of. They are insurance against unexpected inflation. Expected inflation is baked in already.
Years ago, nobody wanted to touch them, and the prices were awesome.
They move a little like bonds though. So if real rates go upâŠthe value of the bond decreasesâŠ
And no matter what inflation does⊠You are locking in an inflation adjusted loss at todayâs prices on many of these maturitiesâŠ
TrueâŠyou have protection if inflation risesâŠ
@dstark, Iâm not recommending them for everyone, but theyâre not as bad as they look at first glance. I had no idea what they were when I bought them, but got lucky.
