valuecfa Posted January 19, 2011 Posted January 19, 2011 Everybody's favorite permabear, David Rosenberg, and his musings on the Municipal bond market. Are we getting close to another once in a lifetime opportunity, not so different from the corporate bond blowup circa 2008. Keep some dry powder. _ TIME TO FADE THE MUNI HYPE There is a clear buyers’ strike in the market for state and local government debt that is largely based on fear and misperception. The mass selling of muni’s, which represent the bedrock of the U.S. economy, is incredible ― nine consecutive weeks of net redemptions totalling $16.5 billion ($1.5 billion in the January 15 week). Talk about fertile ground for a huge long-term buying opportunity. First, even if you buy into the default talk, look at the yield protection you get now. There are some long-term muni’s trading north of eight percent ― even higher than junk bonds (a premium of over 100bps!). Long-term AAA-rated muni’s are now trading well north of five percent or 116% vis-a-vis Treasury bonds (typically, muni bond yields are equivalent to 82% of Treasury yields given their tax advantage). California off-the-run 30-year 6% bonds are now being quoted at a yield premium to dollar-denominated debts offered by the likes of Mexico and Columbia. Give me a giant break. Even in California, only teachers come in front of bond holders. In other states, the debt holders are the first to get paid. It’s amazing how few people know that. The spurious reasons beyond default concerns is that the lower levels of government are saddled with a huge supply calendar (partly because of the expiration of the federal Buy America Bonds subsidy). But in truth, new issuance this year at an estimated $350 billion is lower than the $439 billion in 2010. If we are talking about looking for what is S.I.R.P.-like (safety and income at a reasonable price), investors should screen for: Regions with a manageable refinancing calendar, A or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases. And best to concentrate on bonds backed by a non-cyclical revenue stream like water and power. And have a read of Older Workers Are Keeping a Tighter Grip on Jobs on page B3 of the Saturday NYT. As we have long argued, the prime reason for this phenomena is that the boomers increasingly need income as an antidote to this last decade of lost wealth. And right now, in the muni space, we may well have the most compelling opportunity to add income to portfolios since the rapid meltup in corporate bond yields in late 2008.
gokou3 Posted January 20, 2011 Posted January 20, 2011 If we are talking about looking for what is S.I.R.P.-like (safety and income at a reasonable price), investors should screen for: Regions with a manageable refinancing calendar, A or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases. And best to concentrate on bonds backed by a non-cyclical revenue stream like water and power. I have a kindergarten's level of knowledge regarding bond research. How do I find out the aformentioned information?
twacowfca Posted January 20, 2011 Posted January 20, 2011 Great post, valuecfa. How are the Build America bonds trading now? Have their yields gone up as much as munis?
dcollon Posted January 21, 2011 Posted January 21, 2011 Interesting Bloomberg story http://www.bloomberg.com/news/2011-01-21/u-s-state-bankruptcy-weighed-by-house-republicans-blocking-aid.html
beerbaron Posted January 22, 2011 Posted January 22, 2011 Interesting Bloomberg story http://www.bloomberg.com/news/2011-01-21/u-s-state-bankruptcy-weighed-by-house-republicans-blocking-aid.html It's funny the Republican's bailed the financial industry who acted for it's own profit but won't bail out states that acted for common good. BeerBaron
bttmline Posted January 22, 2011 Posted January 22, 2011 Yields are getting very interesting and trying to catch up on my research. Is anyone here taking positions and through which vehicle i.e Bond fund, etfs, or individual purchases? Listing of current yields on blackrock closed end funds http://www2.blackrock.com/US/individual-investors/performance-pricing/closed-end-funds I'd prefer to go with a respected manager, but just not versed in the bond world like equities. Any muni-bond manager with a long track record that someone could suggest to take a look at?
Hawk4value Posted January 25, 2011 Posted January 25, 2011 "It's funny the Republican's bailed the financial industry who acted for it's own profit but won't bail out states that acted for common good." 2 wrongs do not make a right. It was certainly wrong to bail out the banks. But that does not mean we should bail out the states. Why should people in Texas who are fiscally responsible, bailout the lunatics in Illinois. Each state needs to unwind the idiotic, politically inspired pension deals that were made with the public employee unions. Hopefully the Congress will stand its ground and resist a bailout.
Myth465 Posted January 25, 2011 Posted January 25, 2011 "It's funny the Republican's bailed the financial industry who acted for it's own profit but won't bail out states that acted for common good." 2 wrongs do not make a right. It was certainly wrong to bail out the banks. But that does not mean we should bail out the states. Why should people in Texas who are fiscally responsible, bailout the lunatics in Illinois. Each state needs to unwind the idiotic, politically inspired pension deals that were made with the public employee unions. Hopefully the Congress will stand its ground and resist a bailout. Or honor their promises and pay their bills (deadbeats), by raising taxes. Pensions are crazy, but its more so because they have been underfunded and used as a political tool by both parties.
valuecfa Posted January 27, 2011 Author Posted January 27, 2011 Moody’s plans to include unfunded pension liabilities into its credit rating for U.S. states’ debt, the New York Times reported. A chart showing the states with the largest bonded debt and underfunded pensions: http://graphics8.nytimes.com/images/2011/01/27/business/27pension_gfc/27pension_gfc-popup.jpg
Myth465 Posted January 27, 2011 Posted January 27, 2011 I tend to agree with Einhorn. Moody's is part of the problem. This is a very logical change but poorly timed. They do seem to pile on when things are bad, and paint a better picture when things are good.
Guest Bronco Posted January 28, 2011 Posted January 28, 2011 Why was it crazy to bail out the banks vs. the states? Weren't many of the TARP payments returned for a profit? What's crazy is FNMA and supporting that thing.
valuecfa Posted February 3, 2011 Author Posted February 3, 2011 Congress Wants to Hear from Meredith Whitney on Muni Call -talk of subpoenaing her to appear http://www.foxbusiness.com/markets/2011/02/03/congress-wants-hear-whitney-muni/ _ update: Apparently, she has a calendar conflict. http://www.bloomberg.com/news/2011-02-03/whitney-said-to-decline-house-testimony-due-to-calendar-conflict.html?cmpid=yhoo
valuecfa Posted February 11, 2011 Author Posted February 11, 2011 I doubt it would be very receptive at the moment, but interesting nonetheless http://www.bondbuyer.com/webonly/-1023207-1.html
Packer16 Posted February 11, 2011 Posted February 11, 2011 What do y'all think is the best way to play this? The PIMCO PMX, PMF and PML appear interesting as long as inflation does not roar. Packer
txlaw Posted February 11, 2011 Posted February 11, 2011 I've been watching those Pimco funds you mentioned. I'm also keeping an eye on MBIA and AGO. I'm not sure any action will be taken until we actually have some defaults, but who knows.
valuecfa Posted February 12, 2011 Author Posted February 12, 2011 What do y'all think is the best way to play this? The PIMCO PMX, PMF and PML appear interesting as long as inflation does not roar. Packer I'd stick with individual municipal bonds, perhaps doing a yield search through your broker based on a minimum credit rating, and then check to see if that rating is accurate and what it is backed by, and who if anybody wrapped it....generally sticking with GOs.. If you do go with a closed end fund watch out for those premiums to NAV, especially the pimco ones. Munis, on a whole, though very attractive relative to treasuries and even corporates in most cases, are still not yet at high enough yields to make me take any meaningful positions, other than in MBIA (though that is an equity)and more recently in AGO in the 14s is a good price.
ERICOPOLY Posted February 12, 2011 Posted February 12, 2011 In a sense, they are already implicitly bailed out by the Feds -- the special tax treatment of munis. How much of their borrowing costs must the Feds pay? Perhaps they wouldn't borrow as much in the first place without the tax subsidy.
ericd1 Posted February 12, 2011 Posted February 12, 2011 A place to start is the CEF Screener at CEF Connect...Try "Tax-Free Income" & "National" - From there you can drill down into the various funds. As one article suggested be careful of Illinois bonds. http://www.cefconnect.com/Screener/FundScreener.aspx I'm holding a basket
Packer16 Posted February 13, 2011 Posted February 13, 2011 Aren't the PIMCO funds leveraged funds? So you get more potential upside if munis recover. How do you factor the leverage into the fair value premium? How do you feel comfortable with the bond insurers? As thier market is shrinking (50% to 10%) from the data I have seen and the possibility of adverse selection bias in the municipalities buying insurance. Packer
ericd1 Posted February 14, 2011 Posted February 14, 2011 Aren't the PIMCO funds leveraged funds? So you get more potential upside if munis recover. How do you factor the leverage into the fair value premium? How do you feel comfortable with the bond insurers? As thier market is shrinking (50% to 10%) from the data I have seen and the possibility of adverse selection bias in the municipalities buying insurance. Yes, the Pimco Funds are leveraged and yes there's more upside potential. I'm looking at fair value as the price six months ago with everything else equal. The leveraged funds were down 15%-20% mid-Jan, now they are down 10%-15%. I did not buy insured bond funds. The ones I looked at didn't fall quite as much as the uninsured. Some of the Pimoc funds also carry a healthy premium, If the premium declines the upside is reduced. Other "investment grade" CEFs are trading much closer to NAV, if not a discount. The situation is turning quickly. The 20% decline in mid January equates to a 25% gain upon return to previous prices. Today's 12.5% decline is a 13%+ gain, plus the current 7-8% yield (Tax Eq 10%+) Thank you Meredith!
ericd1 Posted February 14, 2011 Posted February 14, 2011 Interesting article on hedge funds adding munis to their holdings... http://finance.yahoo.com/news/Hedge-Funds-Are-Buying-More-cnbc-3794930567.html?x=0
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