Municipal Bond Alternatives

[Driftr]

Back in December 2010, on a whim I bought some PMX in my brokerage account because the 7-8% yield appealed to me. It now looks like the monthly dividend we've been earning will be tax free (Federal).
I was wondering if others here buy anything muni-related and how they accomplish that. I'd considered researching how to invest in individual muni-cusips and cutting out the Pimpco middle-man, but I haven't taken that step. If you have, please post up here on how you do/did it. I'd also be interested in other municipal funds you like and why you think they're better than PMX.
I considered adding this to the dividends thread, but wanted to keep it separate in case it evolves into how to buy specific Muni cusips.

[verrip1]

You've got a leveraged muni CEF with a distribution yield of 7.88% at yesterday's closing price. You'll never get anything anywhere near a 7.88% coupon on the secondary muni market except possibly with unrated municipalities near bankruptcy and no asset backing. Of course, nothing's free. You paid about a 10% premium to get in in Dec 2010. The premiums have since narrowed at times. It was as low as 4.1% a month or so ago. If you like leverage (derivatives) and current high payouts, you might as well stay where you are. It behooves you to watch the premium/discount like a hawk or you might get stuck with a 10% discount PLUS leverage losses and end up with a significant total loss far in excess of the annual 7.88% yield. It's not unusual for muni CEFs to have discounts of ~10%. If that happens to PMX, you're out at least 20% due to premium/discount alone.

[Driftr]

Thanks for the attempt there V, and apologies in advance if you've already tried, but could you dumb that down a bit (more) for me?

Does the nature of the CEF mean that it will eventually pay out everything and go to zero? Or do they re-invest the proceeds when bonds they're holding mature?

[Unlimited]

Thanks for the link. I see that most are rated AA to BBB and mature in 15+ years. Interesting that a large segment is in tobacco bonds. If I read that right.

I would rather have this PMX fund instead of exposure to single bonds, by protecting some of your money with diversity

[bimetalaupt]

Sept 6, 2011 20:00:02 GMT -5 @franktheimpaler said:

Still like my AAA muni funds...7% so far tthis year!

Frank,
OK, I am getting lazy.. How much is the operating cost of this AAA Mini Fund?? Texas or New York

Bruce

I like the 20 40 40 more all the time.. Just am having a hard time getting solid data on the Future market as most lose money here...

[verrip1]

Sept 6, 2011 20:00:02 GMT -5 @franktheimpaler said:

Still like my AAA muni funds...7% so far tthis year!

Longer bonds did super well YTD. I've got some IP bonds, 3.875 of 28 (base rate) that have hit 155 (bought in late 08 at 112) recently. I also hold a long term investment grade corporate bond fund that is up over 10% total retn YTD.

Some day, interest rates will run up strongly and these prices will drop.

But not today!!!!!

[verrip1]

Driftr:

Just because instruments hold muni bonds, doesn't mean that they all act alike. A closed end fund is a very different animal than an individual bond. You really should learn the difference. There are educational discussions on cefs at www.closed-endfunds.com/ and, I think, www.cefconnect.com/. For bonds, read one of Marylin Cohen's books or look at www.investinginbonds.com/. You really want to learn about bonds? Read Handbook of Fixed Income Securities by Fabozzi.

[Driftr]

Thanks for the links. Followed one and it was too confusing. If it's not something you can do a brief summary of, that's cool. Some day when I have more time and desire, those links will probably really serve me well. Until then I'll take the 7% tax free yield and watch what it does for a couple years. If I like it, I'll get more then. Not too concerned with the value of the CEF shares when I die. More concerned with whether or not they'll be able to keep up the same (or greater) payouts for the next 40 years.

[Driftr]

Sept 7, 2011 16:47:03 GMT -5 @toughtimes said:

Not too concerned with the value of the CEF shares when I die

That's quite a dangerous attitude since there is no reason to believe you won't have to sell them a lot sooner. If the net asset value of the bond is cut in half, you have still lost half of your money whether you sell or not. You may never see the money back. If you get say, 7% and your NAV is cut in half and stays there, you have a loss, not a gain. This is functionally equivalent to taking money out of your bank account and pretending each withdrawal is interest.

I don't consider it a dangerous attitude since I don't plan to let any one holding in our portfolio become large enough that a complete loss would seriously affect us. We will be living off the interest we earn on Treasuries held in out Treasury Direct account and the dividends we'll be earning in our brokerage account. Possibly supplemented with some social security. Whatever the stocks, notes, & CEFs are worth when we die will pass to the kids.

[bimetalaupt]

Sept 7, 2011 9:58:22 GMT -5 @franktheimpaler said:

.43 basis points bruce

Frank,
I am getting to the point where I have come to the conclustion that it might be worth the 0.43% or 43 bases point to let someone else do the heavy lifting.. IE take a little bit less and not have to deal with the replacement action in the bond market.

Thank-you for the info!!

Bi Metal Au Pt...

K4U and for me...

[Driftr]

Sept 7, 2011 21:14:20 GMT -5 @franktheimpaler said:

funds pay didvidends based on the # of shares not share price or value?

Correct, which is why it doesn't concern us if the share price falls as long as the dividend amount paid each month remains stable or grows.

The thing I don't know about these muni-CEFs is whether or not they replace matured munis with new ones. Also not sure how they're going to be able to keep up the payments they've been making if rates stay as low as they are for a long enough period. Time will tell I suppose, and I don't plan to put any more money into either PMX (brokerage) or PTY (IRA) until I see how the dividend stream is affected when rates begin to rise.

[verrip1]

Sept 12, 2011 12:01:32 GMT -5 Driftr said:

Correct, which is why it doesn't concern us if the share price falls as long as the dividend amount paid each month remains stable or grows.

That can work. In some circumstances. But you can get screwed in other circumstances.

If you lose enough principal, by the time you see the distribution dropping enough to worry you, you'll lose out when you sell and re-invest in something else. It can work if the market price slides slowly, and the business plan maintains the distribution over time. Also if the share price is cyclical or volatile. But if it drops due to its market base, you're screwed. With munis, the market bases include interest rates, inflation and defaults.

You are not safe from taking a bath. I don't consider it a near certainty, but it is a definite possibility.

Sept 12, 2011 12:01:32 GMT -5 Driftr said:

The thing I don't know about these muni-CEFs is whether or not they replace matured munis with new ones. Also not sure how they're going to be able to keep up the payments they've been making if rates stay as low as they are for a long enough period.

They have to replace all matured bonds with other bonds immediately to cover all the shares they've sold. They are buying and selling bonds every day - see the turnover ratio in their latest annual report for that parameter. Holding to maturity is not their goal, and probably doesn't happen a lot. You'd have to look at their prospectus to find out their investment policy for coupon distribution versus price appreciation. If interest rates rise, they'll be giving higher distributions, but the NAV prices will drop, possibly dramatically depending on the overall fund duration.