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I'm pretty conservative and keep like half my portfolio in bond/cash equivalents. I don't think I'll need access to this money for 5 or so years.

Do you have any better recomendations than cd's or Schwab Money Markets??

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With CDs now paying 7 1/2% or maybe even a little better, why fool with bonds?
Best wishes, Chris
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Tax equivalent yield (for me) on high grade G.O. munis were around 9% in February, and are up significantly from that point now. Yield depends, of course on your bracket and on how stiff your state tax burden is. Any tax increases to come only make munis more attractive, though there's always the risk of further tax cuts (though I don't see much likelihood there).

A current quote on a 10-year, non-callable G.O. bond rated Aa1/AA+ has a current yield of 5.264%, translating to a tax-equivalent yield just over 9.5% (for our household). These yields may not be as attractive to others.

If munis are not for you, yes, a CD or other decent yielding short-term government fund (money market) is probably a good place to be holding cash now, though I'd be a little concerned about locking too much up too hard or too long, at least until there are fairly clear signs of a true bottom in the bond markets.
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EBlakemore,

For Corporate planning purposes do munis have potential over Treasury Issues?

Are they easy (relative to Treasuries) to match Maturity Dates with needs?

I know the yield is higher for munis (tax equivalent basis), but just wondering about "ease of use".

Ryan
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Good question, Ryan. Never having been involved in corporate planning on the finance side, I can't pretend to understand the factors that would affect your decisions there, and I'm not up on corporate tax rates or tax shelters or any of a host of issues that may affect how one should evaluate munis from a corp. planning perspective. Not even sure where to start looking for sources on that. There may be fiduciary rules or other factors I'm entirely unaware of that affect muni analysis for the corporate planner.

I would guess that the still rather poor liquidity and deficient transparency of the muni market might be of some concern to you, and there have been periodic supply issues that have affected the muni markets in ways that don't always reflect what happens in Treasuries. Still, if you evaluate the risks effectively -- considering that G.O. bonds have roughly the same sort of seniority claims that exist for Treasuries, for instance -- I would imagine there is some incentive to at least evaluate whether munis should be a part of your planning.

There may be a more limited short-term muni market, compared to Ts, but I haven't been active in shorter maturities to say one way or the other, and haven't been tracking that part of the yield curve. CNNfn.com has a good searchable database where you could look to see what's available there at what sort of yield.

In the 5 to 30 year range where I'm mainly focussed for personal planning, supply seems to be better than it was a couple of years ago, especially at the longer maturities. But I'd expect demand to strengthen too as long as current fears promise to escalate, and more people recognize the present effective yield spread between munis and treasuries.
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Believe me there isn't any high-brow stuff going on here. Sometimes I'll have a specific future use for cash. When I have excess cash I'll "fund" this using a Treasury with a maturity to match.

I'm pretty conservative, so when I do it I'm almost guaranteed holding until maturity. Therefore, nothing risky here. Which is nice, because Bond knowledge is my Achilles heal in investing. And munis are lower on the knowledge totem-pole than Treasuries.

Would you mind expanding on this paragraph:

I would guess that the still rather poor liquidity and deficient transparency of the muni market might be of some concern to you, and there have been periodic supply issues that have affected the muni markets in ways that don't always reflect what happens in Treasuries. Still, if you evaluate the risks effectively -- considering that G.O. bonds have roughly the same sort of seniority claims that exist for Treasuries, for instance -- I would imagine there is some incentive to at least evaluate whether munis should be a part of your planning.

Thanks for the link to CNNfn. That has helped a lot already.

Ryan



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Okay, let me try to put that in plain English. Sorry for all the street language. <grin> Keep me honest, will ya?

poor liquidity - Being bonds, first of all, most holders don't engage in speculation, The exceptions tend to be where traders try to make gains when their analysis tells them that a particular bond or set of bonds stand to be upgraded or downgraded in their credit rating. I suppose some traders also speculate when there is relatively fast change in prevailing interest rates, or they feel they have a take on shifts in bond supply that may move the price contrary to what would otherwise be expected, making what amount to short term plays on particular types of imbalance. Hedge fund games, basically.

But the spreads in active bond trading tend to be fairly wide, and tend to eat up most of the theoretical gains one could make in such trades. And usually price change is so small that bond speculation is not a big play, except for hedge funds and others who play with huge chunks of capital. Not something most of us have to worry about. Bigger money (I'd imagine) is also closer to the market, and able to narrow the spreads compared to what retail investors can expect to find through brokers.

While a bond dealer we've worked with has suggested that munis will eventually see a more liquid market, the same way we've seen NASDAQ and ECNs narrow spreads and improve liquidity in equities/common stocks.

transparency - can you get a price you can trust? How open is the information on fair value and what price is a right price? Many brokers like to sell you the part of their inventory they've managed to lock in some short term gains on. Push munis while the prices as prices are in a false rally, that sort of thing. there's much less focus on individual muni issues, so there's some risk that a short-sighted or greedy broker will try to dump soon-to-be downgraded issues on those customers who don't seem like they'll be likely to complain.

supply issues - specifically, during a similar rise in interest rates in about 96, I think, the available supply of munis was not up to the demand, and the effective yield spread between munis and treasuries was not what one would like to see. The same was true at the time in the corporate bond market... spreads were very thin in part because profits (and tax receipts) were up, and the need to borrow was down. That helped fuel the last three years or so of upward momentum in stocks, since there was little in bonds to be excited about, and the fundamentals remained strong. Fundamentals are *still* strong, but people have piled into the most extreme risk pockets of the equities market, and so you're seeing this drop at last, as the supply of buyers for high risk has reached an extreme high point.
The same people who have dumped most equities with any kind of secure profit potential starting around May 1999 also haven't been looking at all at bonds. No demand means, even with a relatively low supply, lack of demand has boosted yields and you see a more attractive risk premium in bonds, especially at long maturities. The other supply factor affecting current yields are the historic buybacks of 30 year treasuries (there hasn't been a buyback of LT Treasuries in 70 years). Interest fears should be pushing the 30 year up, but the buybacks have distorted supply and managed to pull yields down from where they would otherwise have been, mainly because there are pension funds and other large bond buyers who are *required* to buy a certain proportion of LT treasuries no matter what is happening to short-term supply and demand. That factor alone is responsible for a significant piece of the widened spreads, though, given the cause, it would leave you wondering just how big the real spread should be?

Retiring that long-term treasury debt may be a factor in causing LT rates to fall across the board, assuming we don't see any real inflation. In which case, if rates were to fall far enough in the next few years, you could see a singnificant resurgence in at least some stocks, but also find that the LT bonds you bought today would become some of your best long-term performers, if rates were to do something similar in several years to what they've done in Japan over the last 10.

G.O. munis General obligation munis. There are two significant flavors of munis. General obligation munis are usually regarded at higher in quality than revenue bonds, ratings and all other factors being equal. This because G.O.s are backed by the full faith and credit of the state or municipality that issues them. If the issuer can't meet its interest and/or principal payments due, it is required to raise taxes or otherwise generate revenue to do so. Revenue bond repayment is more contigent, backed only by the revenue generated by the project (bridge, toll road, other revenue-generating public works project). An increase in tolls may be driven by the issuer's need to meet its obligations, but if, for some reason, the issuer finds itself unable to increase revenue or meet these obligations, you could theoretically see a default or a delayed repayment in the worst case. The risk is fairly low. Something like a 0.01% default rate (don't quote me, it might be 20 basis points higher, but I'm fairly sure it's well below 1 percent. Still, it *is* very slightly higher than the default rate on US treasuries, historically speaking.

But my point was that G.O.s are backed by "full faith and credit" of the issuer on par with the "full faith and credit" backing that underlies treasury issues.
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EBlakemore,

Thanks, I would give you ten recommendations for that if I could!!

Ryan
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Very helpful post EBlakemore, thanks!

Regarding transparency/supply issues: what's the best way to "shop" for muni's? Are there any specific brokerages you "trust" (e.g., Schwab, etc.)?

Regarding liquidity: how realistic is it to build a muni portfolio with a "short term" (5 year or less) maturity?

In my particular case, I anticipate a "high" annual taxable income for the next five years, so I'm thinking that muni's can provide a good effective return on a chunk of cash vs. treasuries or CD's. But after 3-5 years, I may want to start moving the cash tied up in muni's into something which would have a greater long-term return. Is this a viable strategy?

thanx for your opinion!
-tom
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I can't be sure my answer is a good one, but what I did was to go to my discount broker with the CNNfn quotes in hand and dicker with him until he offered something that had a yield within 3 basis points or so of similar lot sizes and qualities.

A full service broker might tell you that you'll get a better deal with them, since many discount brokers may try to make up something on their more trusting clients who don't ask questions or don't know where to find current muni quotes.

I've seen ads recently for some online services that are entering the muni market too, but I don't know enough about what they offer to say whether they are cost competitive or just trying to turn another twist on a market that remains a bit disorderly.

I'd be fascinated to hear views from others with longer experience in munis than I have. We've owned a sum total of three so far, two $20Ks 10 or 12 years in short succession, and the one $10K 7 year bond we presently hold. I believe the minimum size you can buy is $5K, but brokers I've talked to don't volunteer that info, they prefer to let you think the min is $10K (or more) if you let them.

I anticipate adding one or two more $10Ks this year in longer maturities. More if certain bonuses and A/R issues are resolved in our favor soon for my spouse's group practice.

I learned the hard way on the first transaction, which was sort of imposed, as it was money that my spouse's grandparents were estate planning out of their own portfolios, and a family member was making decisions and setting up the accounts. Mistakes were made, some money was lost for no good reason. I spent a lot of time talking to a full service bond broker who my banker sister-in-law considered to be a rather "dim bulb." Long, long story, but it taught me about half of what I know about munis. Hopefully the rest will be less painful.

You can definitely buy shorter-term munis... in fact there are muni money markets out there that you might want to check out to see how competitive they are for this period, and also give you more flexibility around the big chunks of change a typical muni represents. You'll get a better rate (often a *much* better rate) the longer you hold, and (especially) the larger the base amount of the bonds you hold to maturity. A $100K muni can often get you 20 basis points or more, last I checked.

As long as you stick to high grade munis, "diversifying" muni risk by holding a lot of different bonds doesn't seem to make much sense. The main reason to hold more than one would be to create a ladder of maturities to protect yourself on rate change risk.
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Normally munis are issued in $5000 denominations.
Therefore, "one bond" is a $5000 or so investment. I hear of "round lot" as $250000 or $1M, and also that prices and spread get a little better beginning at $25000.
Sometimes there are "mini-munis". Back when I lived in California, the electric utility sent literature to all customers promoting munis in $500 denomination, limit to one customer 10 bonds. I went the full $5000, and am now pleased to be holding this 6.5% coupon muni. And yes, the utility was in Orange County, and no, it was not affected by the debacle. It has always paid on time and will mature in 2003.
There may also be local munis, too small to be rated by agencies, for local projects. These won't be MBIA insured or anything of the sort, but depending on the community the chance of default is pretty slim.
Best wishes, Chris
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