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Posted by AndyS on June 25, 2009, 5:14 am
Andy asks:
I have noticed that many tax exempt munis and tax exempt school
bonds are paying 4.5 to 5 %..... Lots of them... All AA and AAA rated,
many insured.
Since CDs are only paying 3 to 3.5%, tops, why are the munis
giving such good rates ?
Thanks,
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Posted by Igor Chudov on June 25, 2009, 8:37 am
> Andy asks:
>
> I have noticed that many tax exempt munis and tax exempt school
> bonds are paying 4.5 to 5 %..... Lots of them... All AA and AAA rated,
> many insured.
>
> Since CDs are only paying 3 to 3.5%, tops, why are the munis
> giving such good rates ?
The value of insurance is not as much as one might think, because many
monoline muni insurance companies tried to diversify their business,
and lost huge sums on mortgage related coverage that they issued. So,
if their creditworthiness was tested by widespread muni defaults, they
would not have the reserves to pay.
High rates on munis is because investors, rightly or wrongly, are
concerned with municipalities defaulting.
A good reading on the sad fate of monolines, is here.
http://www.briem.com/files/Ackman_MBIA_12092002.pdf
http://www.newyorker.com/talk/financial/2008/02/11/080211ta_talk_surowiecki?printable=true
Note that since then, some of those insurance companies raised money.
i
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Posted by dapperdobbs on June 26, 2009, 5:33 am
> Andy asks:
>
> I have noticed that many tax exempt munis and tax exempt school
> bonds are paying 4.5 to 5 %..... Lots of them... All AA and AAA rated,
> many insured.
>
> Since CDs are only paying 3 to 3.5%, tops, why are the munis
> giving such good rates ?
>
> Thanks,
Would you be so kind as to provide a two or three specific examples?
By State and Municipality, if not by CUSIP? Muni money market funds
are paying tenths of a percent.
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Posted by Douglas Johnson on June 26, 2009, 9:42 am
>
>Would you be so kind as to provide a two or three specific examples?
>By State and Municipality, if not by CUSIP? Muni money market funds
>are paying tenths of a percent.
I suspect we are talking about different points on the yield curve. According
to:
http://www.bloomberg.com/markets/rates/index.html
2 year AAA general obligation tax exempts are yielding 1% while 30 year are
yielding 4.86%. That's a 28% taxable yield of 1.39% and 6.75% respectively. So
it kind of depends on how much interest rate risk you want to accept.
-- Doug
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Posted by dapperdobbs on July 2, 2009, 7:31 am
[own snipped]
> I suspect we are talking about different points on the yield curve. According
> to:
>
> http://www.bloomberg.com/markets/rates/index.html
>
> 2 year AAA general obligation tax exempts are yielding 1% while 30 year are
> yielding 4.86%. That's a 28% taxable yield of 1.39% and 6.75% respectively.
So
> it kind of depends on how much interest rate risk you want to accept.
>
> -- Doug
That's what I see, too. I look for 3-5 years out, the more traditional
'hump' in the yield curve. In the early 1980's, long-term munis (e.g.
Duke Power) sold at 85-90 paying 13-15%, and the ridiculous "de
minimis" tax rule did not exist. You also got a prospectus
automatically. Prime was at 20%. Then, it was worth it to go 25 years
out, just so you could sell a high YTM in mid 1980's for 130. Ah, to
be young and reckless, no?
Today, I'd rather place bets on a depressed stock market with
companies yielding 4%+, looking for dividend increases and some
capital appreciation. A few companies raised their dividends in Q4
last year and Q1 this year. Run numbers on where an average 8% a year
div increase leaves you in 20 years. Many companies' sales are down
'in the high single digits' and net is off, but the profitability and
the business is sound. Buffett quipped that when the tide goes out you
can see who's been swimming naked (like AIG). By the same tide, you
can see who has good swimsuits.
No disrespect intended to those who insist on safe money, but if one
has some notion that three years from now short term rates may be 5%,
why not hold off on the 20 year commitment until then? The charts on
five and ten year treasuries are spiked up - just on one crystal ball,
that's not a good time to buy.
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