I try in my writings to be low hype, so I avoid brash headlines.? Every now and then, though, one has to pound the table.? With muni bonds today, there are some screaming bargains out there, even if you can’t benefit from the tax deduction.? When have we ever seen muni yields at significant premiums to taxable Treasury yields?? I can’t think of such a time in my investment lifetime.
Should life insurance companies, which can’t fully benefit from the tax deduction buy here?? Yes.? Banks?? Yes.? Pension plans? Yes. Endowments? Yes.? Pretend that they are taxable securities for a moment, and buy them on a spread basis.? When the need for tax avoidance reappears, you will be more than rewarded.
For institutional investors, hedge with Treasuries or Swaps if you are worried about the long end of the yield curve rising.? Beyond tha, I would simply say, stay diversified, and make sure that the munis that you buy have an unshakable economic purpose behind them.
…as long as you don’t mind being invested in a currency that is being inflated away.
Great writing the last few weeks David. A great supplement to this article would be your views on using closed end funds for munis (Scott Rothbort mentioned this briefly on Real Money). Your experience in the bond world would be helpful to myself and I’m sure to others.
I second Paul’s sentiments. Heck, I’m Canadian and cannot enjoy the tax benefits of munis, but I do like to buy cheap assets when others insist on dumping them. As Canadian mutual funds don’t invest in US munis, my question is: does anyone have a few unlevered, closed-end fund candidates for me to do some research on?
Thanks.
The web site http://www.etfconnect.com is useful for screening closed end funds. You can select taxable or nontaxable, sort them by discount to NAV and yield, and look at current mgmt. fees plus historical charts of NAV to get a feel for the percentage payout (after comparing to historical charts of the asset class).
On an unrelated note, I was interested in David’s recent purchase of shares in DB (mentioned on RealMoney). RBS is a similar stock that is trading close to book value, at a P/E of less than 5, and recently reported strong earnings (which the market apparently chose not to believe).
The yield is a function of increased risk here. The glass isnt necessarily half full. As property values are plummetting, tax revenue is too, and municipalities are significantly reducing their budgets and some WILL bankrupt.
Honestly, when REAL inflation is running 8-12%, why would anyone settle for any low yield bond anyway? At least let the coming hyperinflation work for you, not against you.
This advise from the same guy that recommended DFR.
Thanks Josh.
This is an informed opinion. OK; so DFR is down; I’ll argue Thornburg fears are what is driving the stock down below $5.50; but will DFR go bankrupt?? Anything is possible I guess but the risk reward of a largely GSE RMB securities portfolio is decent at these prices.
I myself, small guy from California, decided to buy munis. One closed-end is permanently on my watch list, EVM — Eaton Vance California muni. The drop which munis experienced was reflected in the price of the EVM but faithful to the nature of closed-end funds it dropped less than the underlining NAV.
The lower muni bond price resulted in opening a wider premium gap and made the EVM unattractive for the moment.
Confronted with that I picked a California Muni Index fund — PWZ. It is an index amalgamating only insured bonds and didn’t drop as much as the gap from the spread demonstrated here. I think that the small guy doesn’t have the capacity to pick the most fruitful yields which this dramatic sell off offers to people in the bond trading desks.
Anyway, PWZ it is.