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The muni market overall is set for more gains, but some bonds are riskier than they appear

johnNjohnN
edited July 2020 in Fund Discussions
https://www.cnbc.com/2020/07/09/the-muni-market-overall-is-set-for-more-gains-but-some-bonds-are-riskier-than-they-appear.html

The muni market overall is set for more gains, but some bonds are riskier than they appear


In the bond universe, munis are cheap but buyers need to beware of what is in their muni portfolio as Covid exposure has not impacted all sectors equally.
The market should find a positive catalyst this summer in another round of federal aid, which Congress will address later this month.
Water and sewer bonds, with their steady revenue stream, outperformed other sectors in the first half, while hospitals and transportation were the weakest.
Strategists say education bonds provide opportunities, but investors should pick carefully because the coronavirus could have a big impact on the revenues of some private schools.





..Summer of more pains to come perhaps (high risks in muni and corp bonds, mm cd extremely low yields. High stock volatilities). Nothing working well now

Comments

  • FD1000
    edited July 2020
    The chart is in an uptrend since early May and several HY Munis made 7-9% since then. I'm in. I let my fund managers worry about where to invest because I pay them nicely.
  • wxman123
    FD, would you mind sharing what funds you are in? Thanks.
  • beebee
    @ wxman123, check out PTIMX. It has bounced back better than say VWAHX or ABHYX.

    https://screencast.com/t/CXx5t5AXcsU
  • FD1000
    edited July 2020
    GWMEX. See the (chart) and change the starting date to 5/4
  • MikeMMikeM
    Isn't anyone else concerned about defaults on municipal bonds going forward? The only scenario I see around that is the FED coming to the rescue... again. But I suppose that would be likely. Nothing can fail.
  • rsorden
    @MikeM Defaults are def a concern of mine...which is why it might be best to use insured munis...MMIN is one such fund, run by a good firm, MacKay
  • FD1000
    I'm always concerned but when I see an uptrend I invest until it's gone. Over the years I have learned that the "experts" can't predict the future and definitely not the coming weeks-months. After a big dive, bonds just like stocks usually come back. The Fed is also supporting several bond categories, including Munis.

    How many times I have heard the experts are concerned about stocks and especially the top tech companies in the last 3 months? hundred times and QQQ keeps going up like crazy.
  • msf
    While I generally try to take a longer view rather than be unduly influenced by (relatively) recent experiences, I admit upfront to being biased here by the 2008 collapse of the muni bond insurers.

    ISTM that insurers can provide a valuable service when they spread their risks and payouts are isolated. But results can be disastrous in the face of a systemic failure.
    ...[T]he low frequency of municipal bond defaults made the insurance business seem quite safe. Insurers responded by increasing their leverage—using less capital to insure more bonds—and diversifying into the more profitable business of insuring structured finance debt instruments such as collateralized debt obligations (CDOs).

    Structured finance proved fatal to most insurers during the financial crisis. Defaults on CDOs backed by subprime mortgages resulted in numerous claims on the insurance companies’ thin layers of capital, which (at least in the case of MBIA) was less than 1 percent of insured par. As a result, all insurers either became insolvent or suffered multiple notch downgrades. At the beginning of 2008, Moody’s rated seven bond insurers Aaa; none carried this rating by the end of 2010.

    Since 2012, only three insurers have been active, and none were rated higher than AA/Aa by the major rating agencies.
    https://www.mercatus.org/system/files/mercatus-kriz-joffe-municipal-bond-insurance-v1a.pdf

    Muni bond insurance appears to be in the throes of adverse selection. The market for coverage of new issues peaked at 57% in 2005 [ibid.], and is now at just 5-6%. Adverse selection occurs when the "healthiest" issuers opt out because they'd rather not subsidize the risk of the "sickest" (lowest rated) issuers.

    The insurers seem to be focusing more these days on their muni bond coverage. So while they don't have CDO exposure, a systemic problem in the muni market could sink them this time. Especially given the lower (still investment) grade bonds that they are likely insuring.

    For example, MMIN's top holding, Phenix City Alabama Brd Ed Sch Tax Wts 4.0%, due 8/1/2037T (CUSIP 717335CC5) has an underlying rating of A+ according to S&P. (See EMMA for ratings)

    I'm not knocking the value of the insurance for isolated defaults. I am wondering about the value if the concern is municipal risk in general.
  • MikeMMikeM
    edited July 2020
    Thanks @rsorden and @msf for the information. I could be wrong but I'm not sure risk versus reward is good for munis going forward for the reasons you guys mention.

    In my opinion, Municipals, both local and state, will feel the ramifications of this recession for years to come. But the title of this post pretty much says it all. Good for a trader I guess but I've never been too good at that. I see myself more as an investor.
  • wxman123
    Thanks FD and Bee. For me its VWALX, have had it for years and no complaints. It seems all of our funds are relatively the same on performance and risk, give or take. Performance Trust muni has been on a role this year (PTIAX not to bad either) but longer term its in line with the others. NHMAX (which I also hold) has been good long term but having an off year (it happens).
  • FD1000
    NHMAX+ORNAX have usually the highest risk and NHMAX has leverage greater than 20%. This is why l selected GWMEX. Since I'm a trader I watch the chart very carefully.
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