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Time to sell individual muni bonds?

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About 20% of our taxable account is held in individual muni bonds with laddered maturity dates. As yields have declined, the YTM is under 2% for many of them. I've sold a few but before I sell more, I want to check my logic.

The argument for holding the bonds is that they offer an attractive 5% coupon and there'd be a capital gains hit if sold. The bonds maturing in 2025-2030 will hold their value for several more years so there's no rush. Yes, these bonds will loose value as they approach maturity and loose even more value if interest rates rise but the same thing will happen with muni bond funds.

The argument to sell is that I believe I can do better - maybe a lot better - than the 2% YTM. I may have to take on more risk  with HY muni bond funds or CEFs; as well as selectively moving into  taxable offerings. That's what I've been doing along the way and it's worked well. With yields as low as they are, I'm wondering how aggressive to be on this front.

I want to take this opportunity to thank FD, YBB, Aubergine, Cape Cod, JR in NY, Steady Eddy and all the other expert posters for all their insight over the years! I've learned from everyone. You've been life savers. 

Sincerely, Paul 

  

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Re: Time to sell individual muni bonds?

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we calculated for a client, and the loss of premium closer to a call date or maturity would be mostly offset by the remaining coupons. also, there is a bid-ask to consider when trading. so we decided to hold there, without adding to individual positions. it truly is a challenge to get attractive yield nowadays.  with all my attraction to CEFs, i wouldn't be paying today's prices on most of them. 

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Re: Time to sell individual muni bonds?

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If you bought them as new issue at higher coupons [or at higher YTM] and YTM is only 2% now, you have decent gains on them. These gains would disappear if you hold them to maturity. So, if you have decent gains, take those and figure out what to do with the proceeds. May be core-plus muni or HY muni or something else such as multisector bond funds or conservative-allocation hybrid funds.

YBB
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Re: Time to sell individual muni bonds?

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If you are collecting 5% coupon (pretty substantial) do you care what happens to the value before maturity? You should get all your principal back, correct? Seems as if you were smart to lock that 5% yield.

Also I have been reading on muni bonds and there is a shortage starting on them. But what you are saying has been stated here by R48.


@PTG wrote:

About 20% of our taxable account is held in individual muni bonds with laddered maturity dates. As yields have declined, the YTM is under 2% for many of them. I've sold a few but before I sell more, I want to check my logic.

The argument for holding the bonds is that they offer an attractive 5% coupon and there'd be a capital gains hit if sold. The bonds maturing in 2025-2030 will hold their value for several more years so there's no rush. Yes, these bonds will loose value as they approach maturity and loose even more value if interest rates rise but the same thing will happen with muni bond funds.

The argument to sell is that I believe I can do better - maybe a lot better - than the 2% YTM. I may have to take on more risk  with HY muni bond funds or CEFs; as well as selectively moving into  taxable offerings. That's what I've been doing along the way and it's worked well. With yields as low as they are, I'm wondering how aggressive to be on this front.

I want to take this opportunity to thank FD, YBB, Aubergine, Cape Cod, JR in NY, Steady Eddy and all the other expert posters for all their insight over the years! I've learned from everyone. You've been life savers. 

Sincerely, Paul 

  


 

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Re: Time to sell individual muni bonds?

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5% muni coupons were long time ago. It isn't clear when the OP bought them.

But just for fun, I calculated gains on 30-yr muni with 5% initial coupon [or YTM] and now at 2% YTM. The gain is 67.2%. FWIW, I won't let that value to dissipate to par at maturity.

YBB
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Re: Time to sell individual muni bonds?

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@PTG wrote:

About 20% of our taxable account is held in individual muni bonds with laddered maturity dates. As yields have declined, the YTM is under 2% for many of them. I've sold a few but before I sell more, I want to check my logic.

The argument for holding the bonds is that they offer an attractive 5% coupon and there'd be a capital gains hit if sold. The bonds maturing in 2025-2030 will hold their value for several more years so there's no rush. Yes, these bonds will loose value as they approach maturity and loose even more value if interest rates rise but the same thing will happen with muni bond funds.

The argument to sell is that I believe I can do better - maybe a lot better - than the 2% YTM. I may have to take on more risk  with HY muni bond funds or CEFs; as well as selectively moving into  taxable offerings. That's what I've been doing along the way and it's worked well. With yields as low as they are, I'm wondering how aggressive to be on this front.

I want to take this opportunity to thank FD, YBB, Aubergine, Cape Cod, JR in NY, Steady Eddy and all the other expert posters for all their insight over the years! I've learned from everyone. You've been life savers. 

Sincerely, Paul 

  


@PTG 

So ... it would seem that you have some 5% coupon bonds that you bought over par value but have appreciated since you bought them.  If that's incorrect, please give me the specifics of one of the bonds.  

Good for you.  All of my 5% coupon bonds that I purchased in 2009 have been called (except for Puerto Rico which is trading above par because it is a revenue bond). 

Instead of buying more individual bond (at a much lower coupon rate) to replace them, I went the CEF route.  Why?

1.  Leverage can take a lower returning bunch of bonds and generate more revenue, albeit at a greater risk.

2.  Tax changes.  Say you had $250,000 in income after deductions in 2017, that put you in the 33% bracket where a 3% yielding bond was the equivalent of 4.5% after taxes (more potentially if you had state bonds).  However, now that same amount of income puts you in the 24% bracket where 3% is the equivalent of 3.9%       

CEFs have done well in the last couple of years, with all of mine in the black and some with double-digit gains.  I haven't bought more because I don't really think there is much room to run.  I'd love to be wrong.  

ctyankee

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Re: Time to sell individual muni bonds?

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Yes, I have about 20 muni bonds priced between 115 and 150 with about $20,000 in unrealized gains. The maturities range from 2025 to 2030. I converted some money from a traditional IRA into a Roth in 2020 so I'm in high tax bracket this year but a lower tax bracket in future years. If I put the sale proceeds into funds such as ORNAX, PML or PCI and they loose 15% in value over time, I figure I'm still ahead.   

I talked with my Fidelity rep last week who said a lot of his clients have the same issue with highly appreciated muni bonds. Fidelity is silent on whether to hold or sell although all his clients are holding the bonds. I wasn't seeking advice from him, just curious what others are doing. 

 

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Re: Time to sell individual muni bonds?

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I've faced this decision in the past.  A couple things you might want to look at:

- After tax YTM.  If you wait, you replace fully taxable capital gains with almost exempt muni dividends.  So figure taxes into the equation and see if you're still sub-2% if you sell today.

- Bond ladders force a portion of your asset allocation to be in short-term bonds.  YTM on short-term bonds is routinely minuscule.  So I got rid of that end of my ladder, routinely selling years before maturity.

In your position, unless the after-tax YTM is above 3%, I'd sell.  If I needed some portion of that money as short-term, non-volatile cash I'd just use CDs or high yield savings.  And for the investable portion, you should be able to do better than 2% over 5-10 years unless the world gets really screwy.

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Re: Time to sell individual muni bonds?

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we calculated for a client, and the loss of premium closer to a call date or maturity would be mostly offset by the remaining coupons. also, there is a bid-ask to consider when trading. so we decided to hold there, without adding to individual positions. it truly is a challenge to get attractive yield nowadays.  with all my attraction to CEFs, i wouldn't be paying today's prices on most of them. 

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