Muni Bonds and ETFs

By pjain      Published June 25, 2021, 11:49 p.m. in blog Invest   

Muni Bonds and ETFs Investing Strategies as of 2021

2020 Fixation with Short Term Bonds to avoid Risks of Inflation and Rising Rates

IBonds purchase every year for 2% - $10k/person - TODO

Evaluation of Muni ETFs - June 2021

  • Munis tax free 2-3% vs 10yr<2%

  • Reality Muni Bonds are very low - 08/27/2019 on

Rating 10 20 30
AAA 1.2 1.7 1.9
AA . 1.35 1.85 2.05
A 1.5 2.0 2.2

Calif munis CMF

A CMF 1.86%

? CXA 2.11%

? PWZ 2.4%

Strong inflows

Muni Bonds 101, Keys and BPR

Volume of Issuance

The volume of issuance of US Muni-bonds is roughly $40b/mo in 2020. Of that 40% is refunding of existing bonds.

Role of Insurance

State and local government finances are generally emerging from the depths of the pandemic a bit better than expected. Revenues dipped but didn't collapse ("State and Local Finances Closer to a Boost"). In addition, their budgets were boosted by $350 billion in aid from the American Rescue Plan, approved in March.

But there was encouraging news even earlier, prior to large-scale U.S. vaccination efforts. Issuers seeking to lower their borrowing costs began using bond insurance at an increasing clip, and the leading muni insurers earned top ratings ("Insurers Healthy as Muni Bond Insurance Blooms").

Overall, muni investors like what they're seeing, pushing the return on tax-free bonds above Treasuries for seven consecutive months through April, the longest streak since 2014. So far in 2021, investors have added more than $28.8 billion to muni funds.

AMT and Muni Bonds

Taxable Muni Bonds - Whats the Attraction

Income Investing and Bonds 101

Ladder Strategies

Ladder Strategies theory has been espoused by many for long. It posits that by buying, say, 2 to 10-year munis with maturity dates staggered every two years, you can reinvest principal as they mature and keep pace with so-called higher nominal rates.

Bond Brokers Don't want you to Ladder Munis - Want all your money NOW!

Problem is, if you've used this laddering strategy over any extended period of time, you've invariably received lower yields on each successive purchase.

Because of the popular, yet mystifying appeal of this strategy, we've explored this subject several times, as far back as

laddering is an illusion. Investors earn greater yields through long-term bonds. Even slight differences in yield between long- and short-term bonds can add up to significantly more income over time.

How have investors who heeded this advice fared? Exceptionally well, as a peek at historical yields shows.

40 years of Rates falling - Now what?

Will Bond Prices fall as rates rise?

Don't Market Time Munis?

According to Bond brokers, you shouldn't market time, just buy and hold ALL THE TIME.

Investors try to outguess the market. Unhappy with current yields, they think it makes sense to park their money in money-losing money-market funds. They figure at some point, they'll jump back into the muni market when yields are higher.

Except they don't know when, or if, that occasion will arise. No one does. Most important, these investors don't consider the cost of waiting, i.e. the tax-free income they sacrifice to earn while waiting for yields to rise. This is money they'll never recoup.

In 2000, insured bonds were yielding about 5.60% -- astronomical by today's standards -- yet some investors were pining for the higher yields of years earlier.

Can you imagine how much money they left on the table while waiting in vain?

Bond Broker just want you to buy buy buy!


Buy Crap "Revenue Bonds" from Brokers!

We revisit this theme often, including a piece on the actual cost of waiting ("Now We Know the Cost of Muni Market Timing") a

Can US Gilts go Negative Rates?

r Resources and Articles

MUNI Bonds Timeline and Futures

2021 Massive demand-Low Supply for Muni Bonds

2020 Covid States flush with funds do Recalls on

Rushing ahead of Tax Rate raises

2021 AIBs Infrastructure under Biden could launch Hundreds of Billions - NOT TAX FREE

Under a bipartisan Senate bill reintroduced April 2021, a new class of direct-pay bonds would be created, American Infrastructure Bonds. Direct-pay muni bonds could be making a comeback under Biden.

State and local governments would be authorized to issue these taxable bonds for any public-purpose expenditure that could be financed with tax-free bonds. Projects such as ports, bridges, roads, broadband, water systems and others would be eligible. Under the AIB bill, state and local governments can use the AIB program as they see fit and wouldn’t be constrained by a cap on allocation. Additionally, unlike BABs, the new bonds would be exempt from sequestration, increasing the confidence of both bondholders and issuers.

The federal government would pay 28% of the bonds’ interest to state or local issuers, hence the name “direct-pay” bonds. Although not tax-free, the bonds offer a more attractive interest return for investors and lower borrowing costs for issuers as compared to T-bonds restricted to central govt.

The higher interest rates offered by AIBs are expected to attract investors who don’t benefit from the tax advantages of tax-free bonds – institutional buyers, such as pension funds and insurance companies, as well as non-U.S. residents.

“To build an economy that delivers opportunity for all, we have to invest in 21st century American infrastructure,” Bennet said. “The American Infrastructure Bonds Act would help state and local leaders finance the much-needed projects that are critical to building stronger and more resilient communities.”

2020 Emergency lending programs - MLF and Biden/Yellen '21

Trump Started April were ended Dec 31 - not effective

The Fed established the The Municipal Liquidity Facility in April to directly purchase up to $500 billion of short-term notes from state and local governments.

State and Muni Issuers however, were put off by its relatively high borrowing costs, narrow eligibility requirements and limited maturity period. It drew scant interest.

MLF expired Dec. 31 and was ordered shut down by then Treasury Secretary Steve Mnuchin.

Biden/Yellen '21 to extend - NOT! Want their own priorities - only if states get in trouble!

Early 2021, Yellen indicated her support for the MLF and other, similar programs for businesses. Although they didn’t, at the time, extend much credit, simply announcing the programs “largely stabilized” the corporate and municipal bond market, she said. “Of course, if these markets seize up again, the Fed’s programs can extend credit,” Yellen said.

Yellen and current Fed Chair Jerome Powell have both indicated they believe in having extensive resources available, even if they’re never ultimately fully deployed.

2018+ SALT-proof Munis tax free 2-3% vs 10yr<2% claim> high-quality municipal bonds are yielding 2.75% to 3.00% – while taxable 30 year Treasury bonds are hovering around 2.00%. - however many may be OUTSIDE CA, and Revenue bonds for long duration 30yr+ and CALLable! So net net after transactions you are locked in too!

2009 Build America Bonds after GFC - Direct Buy Muni-Bonds

BAB were introduced in the wake of the Great Recession as a way to help state and local governments regain access to the bond markets. The federal government would directly pay of the bonds’ interest to state or local issuers, hence the name “direct-pay” bonds. The federal government covered 35% of the interest payments.

The program lasted less than two years, but investors eagerly snapped up $181 billion of the bonds.


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