Municipal bond funds are getting trashed since the election

[mathjak107]

Originally Posted by mathjak107

never judge any bond bond by 2008 . 2008 was a fluke . i lost money in a money market.

conservative funds like fidelity ultra conservative bond fund got hammered .

basically funds were loading up on on derivative products like cdo's that were untested and were no different than the mortgage packages that funds always bought but these were marketed with a new twist to them that made them illiquid .

in my portfolio we reduced equity allocation by a bit and used high yield as a proxy . it reduced risk and volatility and worked out way better than the equivalent money in equity's even on a purely reward basis forgeting the fact the beta is 1/2 the s&p 500 .

just to elaborate .

most fund family's did what fidelity did back in 2008 . they maintained a central core fund , kind of a mutual fund for the mutual funds .

if a manager was having trouble finding yield or investing incoming money fast enough the funds could buy from the central core fund .

these funds were loading up on new untested products that were basically the same old products they always bought with a new marketing twist to them that increased yield .

funds every where from money markets to bond funds bought these new cdo products .


these products ended up freezing and liquidity stopped when the markets got nervous about their structure .

these basic mortgage packages at heart ended up being toxic as no one wanted the new marketing twist anymore .

those products are gone from bond funds today and the outcomes are quite different then those products resulted in .

no one could believe our money market lost money and folded . such conservative funds like fidelity ultra conservative bond fund lost a fortune .

so look at any 2008 bond fund results very skeptically as they were likely very very skewed by a one time event that likely will not duplicate...


this year my high yield fund is up 12.40% ytd , my equity fund 12.33 , but the high yield fund has far less volatility than the stock fund does and likely will even fall less in a market downturn . the s&p 500 is up 8.66% for comparison . the high yield fund has a beta of only .57 where as the s&p 500 has a beta of 1 and the equity fund i use has a beta of .94

[oneslip]

Originally Posted by BeerGeek40

MJ, yes I do. I was figuring I'd go into Muni's for 3-6 months then trade back out of them, so I'm not concerned with the tax exempt status.

If your not concerned with tax exempt status then why buy Muni's & not higher yielding bonds?

[TwoByFour]

Originally Posted by mathjak107

never judge any bond bond by 2008 . 2008 was a fluke . i lost money in a money market.

Fluke or not, I use 2008 as a sniff test of any fixed income I buy. AGG (Barclays US Aggregate bond index) barely had a wiggle in it in 2008. For me, fixed income is for safety and I want to know exactly how safe and robust any fixed income investment is. What it did in 2008 tells me that. I sleep better at night now that I got rid of HY.

[mathjak107]

Agg is an index and was not allowed to partake in anything but what was in the index , hence no cdo's .

but keep in mind agg falls very short when it comes to being a total bond fund . it is almost 1/2 interest rate sensitive treasury and gov't bonds . it misses owning many other segments of the bond market , especially the less interest rate sensitive area's .

all was well and good with these funds when rates were falling . .

[mathjak107]

as an example , since rates on bonds went up the ytd on agg is 2.77% . that is a very interest rate sensitive fund . if you compare that to a bond fund geared toward a rising rate environment like fidelity floating rate ffrhx , they are up 8% ytd .

[TwoByFour]

Originally Posted by mathjak107

but keep in mind agg falls very short when it comes to being a total bond fund . it is almost 1/2 interest rate sensitive treasury and gov't bonds . it misses owning many other segments of the bond market , especially the less interest rate sensitive area's .

AGG is considered to be on the low end of interest rate sensitivity. Its effective duration is 5.2 years. The effective duration for VWEHX (HY bond fund) is 4.5 years, just slightly less.

I am not real concerned with interest rate risk anyway since I am a buy and hold investor. I just sit on it and wait for it to recover, which it will.

When I first bought HY bonds, I did a lot of research into the actual default rate experienced by VWEHX. It is very hard to get that from the prospectus since they bury it in accounting. But in normal, non-recession years, you can expect 1-2% in defaults. But that can go up to 5% in a recession. That is a pretty big erosion of NAV. It seems to me that you really don't want to hold onto HY for very long and that HY is really better suited for short term speculative investing. At this point in my life, I am not into that.

[mathjak107]

nothing I buy is forever . everything is used during it's sweet spot and over time gets swapped for better choices . high yield is only here until it is not

[BeerGeek40]

Originally Posted by oneslip

If your not concerned with tax exempt status then why buy Muni's & not higher yielding bonds?

Short term thing. I'll be out of them once Trump has been in office for a few months and get a better idea of what he's going to do.