- quote -

There are multiple factors driving down the price of munis these days:

Concern over the creditworthiness of the monoline insurers.

Lack of bids for auction rate securities, and the reluctance of
institutions to step in to make a market.

Heavy selling by leveraged investors such as tender offer boards and hedge
funds to meet recent margin calls.

A hefty new issue calender over the next few months.

As the cliche goes, it's been a Perfect Storm. Vanguard's long term
munibond fund (VWLTX) was trading at $11.30 per share as recently as
January 23. Friday it closed at $10.56, which is a whopping 6.55 percent
decline in about a month. Leveraged closed end munibond funds have been
hit even harder. Blackrock's BYM (which invests in insured bonds and is
particularly affected by the monoliner problem) has lost 9.22 percent over
the same period. Those are big losses in the usually staid world of fixed
income, where boring is good.

But as Beliavsky noted, the decline in bond prices (and NAVs for bond
funds) means you get more yield for your money. VWLTX is returning 4.01
percent currently, and a careful investor can beat that by 75 to 100 basis
points if he shops carefully for individual bonds and accepts some
duration risk. If you can tolerate the volatility that comes with
leverage, BYM is yielding a juicy 5.5 percent at Friday closing price of
$13.30 per share.

Those who follow the fixed income markets have concluded that munis are a
screaming buy here. According to a story on Bloomberg.com, PIMCO Bond
Guru Bill Gross said Friday that munis have been "sold without discretion"
and they are "more attractice than we've seen in decades." He noted his
funds are taking advantage of the selloff to purchase good bonds at low
prices.

Citigroup Munibond Guru George Friedlander, in a note dated February 29,
called it an "unprecedented yield backup," and explained that munis are so
cheap relative to taxable bonds that they are being bought by a "new class
of investors." He opined that with the stock market being rather shaky
these days, the chance to earn more than five percent in good quality
munis plus the possibility of a capital gain if the market settles down,
makes them a "compelling alternative to stocks," at least for some part of
an investor's assets. He cautioned that the volatility could continue for
"weeks or months, " but he nevertheless recommends putting additional cash
to work and lengthening average maturity.

Finally, in the latest issue of Barrons there is an interview with T. Rowe
Price fixed income manager Mary Miller, who opines "we think that
municipals trading at more than 100 percent of Treasury yields are a very
interesting investment."

And let's not forget that munis are always tax exempt at the federal
level. (Unless you're paying the AMT, and even then you can avoid the
problem by steering clear of private activity bonds.) And they may be tax
exempt at the state level. If you're a high bracket investor or you live
in a high tax state this can make a big difference. I'm in the 28 percent
bracket, but I live in D.C. where the top rate is 8.7 percent. Munibond
interest from whatever source is double tax exempt here, so my tax
equivalent yield on BYM is 8.37 percent. As Beavis & Butthead would say
that definitely does not suck. Granted, leveraged close end munibond funds
are not for everyone. But for risk capital in a taxable account it makes
sense for me. For the less aggressive investor the yield on VWLTX is
decent for a product with the Vanguard imprimatur and a paltry fee of only
16 basis points.

All in all, I think Mr. Beliavsky is on to something here.

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On Feb 22, 5:10*pm, beliav...[at]aol.com wrote:
- quote -

What is most tax efficient when accumulating is NOT always the most
tax efficient when drawing down.

I would use the following criteria for consideration

1) munis are tax efficient during accumulation and withdraw
2) putting equities, which might be taxed at rates as low as 5%/15%
into Tax favored accounts, which would tax them at 15-25-28-33-35%
federal tax rates is doubling the tax you might pay on those
investments during withdraw
3) the longer the period of tax defferal, the more #2 makes sense for
equites to be in tax favored accounts.

My point is that if someone is 20 something, in 25% bracket or higher,
then equities in tax favored accounts makes sense. If person is in
50's, with around 10 years to retirement in 25% tax bracket, I would
argue that placing equities in taxable accounts is a better choice,
with higher yielding bonds in tax favored accounts.

These are generalizations, though, everyone's situation is different.

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On 2008-02-22 14:10:41 -0800, beliavsky[at]aol.com said:

- quote -

It seems to me simple logic that products that are taxed at the highest
rate should be in tax-deferred accounts and those taxed at the lowest
rate should be in taxable accounts. If I were going to buy bonds at
all, I would put them in the IRA and 401 until those accounts are
filled up to the limit or there were no more bonds. But if someone were
pushing equity mutual funds as an investment and knew you still had
room in the taxable account, I suppose they would want you put equity
funds there and would not like to talk about bonds at all. Personally I
don't do bonds.

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In article
<bb4d84c6-8cc2-4a6d-baff-a02acd871913[at]i12g2000prf.googlegroups.com> ,
beliavsky[at]aol.com wrote:

- quote -

Makes even more sense if you live in a high tax state and you buy bonds
from that state.

As the muni bonds yields/ to treasury bond yield ratio moves back to its
historic levels you will also achieve a capital gain.

Having said that you need to watch what you buy (revenue bonds are not
such a good idea) and remember that the guy who insured the bond may not
survive the current credit crunch. Also muni bonds are not as liquid as
treasury (you may take a beating if you have to sell before maturity)

Muni bond funds might be a better idea.

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beliavsky[at]aol.com writes:

- quote -

The "asset location" strategy described in this article from Forbes
that was posted here the other day doesn't mention munis, but they are
certainly one of the top candidates to hold in a taxable account.

http://www.forbes.com/forbes/2008/0225/040.html

Personally, I'm in a situation where I have about twice as much money
in my taxable account as in my Roth IRA, and about twice as much in
the Roth as in pre-tax retirement accounts. Even if I made the
pre-tax accounts 100% bonds, I'd be well short of my overall target
AA, which is now around 30-35% bonds. So the rest is munis in the
taxable account. As the Forbes article suggests, my Roth is 100%
equities, including the more tax-inefficient of the actively-managed
funds I hold. Again, taxable account gets what's left over.

-Sandra the cynic

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In article
<bb4d84c6-8cc2-4a6d-baff-a02acd871913[at]i12g2000prf.googlegroups.com> ,
beliavsky[at]aol.com wrote:

- quote -

Some people advise sticking it all in your mattress and buying
high powered weapons. That doesn't mean that it is good advice,
or that some potentially good advice applies in your situation.
I don't like to see anyone in the bottom 95% of wealth owning
bonds when they are under 80 years old. But that is just my
opinion.

-john-

--
================================================== ====================
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beliavsky[at]aol.com wrote:

- quote -

One obvious one is that you're ignoring investment-grade corporate
bonds.




Brian

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Some people have advised that the bond portion of one's portfolio
should be in tax-deferred or tax-free accounts such as IRAs and
401(k)'s and that stocks should be in the taxable account. Currently,
the ratio of municipal bond yields to Treasury bond yields is so high
http://www.bloomberg.com/markets/rates/ that I think it makes sense to
own municipal bonds in the taxable account and stocks in the tax-
deferred account. Comments?

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