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Participant ○○○

Several months into the crisis, with states and municipalities already starting to layoff employees, what do folks think the real default risk for muni bonds is? 

The way I see it, Income, Property, and Sales taxes are the main funding sources.  Already, property taxes in many places are high enough to seriously hurt the future of any politician that wants to raise them and will exceed the payment capacity of homeowners and landlords, especially if the COVID-19 pandemic continues to affect economic activity.  Ditto for state income taxes.  And, if economic activity plummets, even raising sales taxes would not net much.  It boils down to political risk - will Congress allow municipal and state bankruptcies? if so, good bye to your money.

And, please, avoid politics. This is not a R vs D issue.

 

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Frequent Contributor

Muni GOs are affected by state & local government finances. Revenue bonds are affected by project revenues. Both may be impacted by Covid-19. HY may also be affected by court actions. With all the worries, muni defaults haven't risen yet. Muni market is mostly retail market and not distorted by foreign or institutional fund lows like Treasuries are.

I take moderate risks with core-plus muni funds [not a M* category] that may have "BBB & below+NR" in 25-35% range.

YBB

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Contributor ○○○

It will most likely be a balance act but not many defaults. Projects will be delayed, workers will be laid off and sales taxes may need to be raised some and yes some FED help, especially if Congress flips. It never bothered CA to raise any tax.. They may be maxed out in gas tax (2 raises in 3 years) but there is a big move to remove the 1970s proposition 13 and that will raise property tax revenues.

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Frequent Contributor

Muni GOs are affected by state & local government finances. Revenue bonds are affected by project revenues. Both may be impacted by Covid-19. HY may also be affected by court actions. With all the worries, muni defaults haven't risen yet. Muni market is mostly retail market and not distorted by foreign or institutional fund lows like Treasuries are.

I take moderate risks with core-plus muni funds [not a M* category] that may have "BBB & below+NR" in 25-35% range.

YBB

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The Muni charts(link) are in an uptrend and why I'm in. I can't predict what Munis will do in 1-6 months and beyond. I'm in a high % in HY Muni.  As you can see from the chart below April to mid-June had the best performance and since Mid June performance slowed down.

muni.PNG

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All I know is that the income from VWALX has been coming in for years.  It won't make or break my portfolio.  Got clobbered in March (has happened before)--juicy yield. :-)

Bob

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VWALX has HY in its name but it is really core-plus with "BBB & below+NR" at 35%. Another way to describe it is as conservative HY. Unfortunately, M* has only broad regular muni [ST, IT, LT] and HY muni categories.

YBB
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Participant ○○○

I am using Vanguard's limited term muni fund as a partial substitute for the federal money market fund. YBB may have mentioned this possibility recently. I held considerable amounts years ago when interest rates were higher and munis offered me personally tax savings. If someone wants to maximize return and trades or accepts volatility then hy-yield munis may be a good option, since the AMT was eliminated. My portfolio goals have morphed into a mini-max approach for a number of reasons.

 

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We only hold bond investments within TSP and TIAA and I don't think they have HY muni bonds. Where I live, county revenues are down and I expect an increase in property taxes to pay for their costs (Fire and Policy Dep, School budgets, Road repairs). Like everybody else, municipalities will have to adjust until things go back to normal.     

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@jmrdnc , I do have ST/LTD muni core VMLTX in taxable for liquidity purposes [instead of m-mkt funds & ST CDs]. It has "BBB & below+NR] at 11% only.

YBB
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Carlos,

We just got our summer property tax bill.  It was up 3.3%.

Our city/county can't just arbitrarily raise taxes.  We do have two proposals that we will vote on in August.  We have already voted by mail.

Bob

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Participant ○○

 

"...general obligations and school, highway and water/sewer bonds are sound..."   (Kiplinger's, July, p 31)

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