Municipal bond funds - is the risk worth the little reward?

[progree]

https://www.marketwatch.com/story/making-sense-of-the-turmoil-in-the-muni-market-2020-05-22?siteid=yhoof2&yptr=yahoo

Opinion: Making sense of the turmoil in the muni market, Mark Hulbert, 5/22/20

Is it safe for retirees to tiptoe back into the muni bond market?

I ask because that normally staid and sleepy market endured nothing short of an earthquake in March. In the space of just nine trading sessions, for example, the iShares National Muni Bond MUB plunged 13.7%, in one fell swoop wiping out years of any benefit that munis otherwise have over other bonds. High-yield munis performed far worse: The Van-Eck Vectors High Yield Municipal Index ETF HYD, +0.24% fell 36% from late February through mid-March.

The muni market in April quieted down somewhat from that extraordinary burst of volatility, and muni bonds have recovered some (though not all) of their mid-March losses. With the dust mostly settled, gutsy retirees and soon-to-be retirees are wondering if they should either return to the muni arena or even increase their pre-existing exposure.

One initial sign that it might be safe to return is that the premium/discount to NAV at which muni ETFs are trading have returned to low levels. As you can see from the accompanying chart, the MUB traded at an extraordinary 5.8% discount to its NAV on Mar. 18, after having continuously traded over prior months at a tiny discount or premium. This revealed a huge amount of turmoil in the muni market. Since then, as you can see, the MUB has return to trading at close to pre-March norms.

For starters, let’s compare muni bonds to Treasurys etc. and etc. and etc.

He goes on to compare the risks and yields of Treasuries, corporate bonds, and munis.

Also about Mitch McConnell in late April scaring the muni market by saying that states and cities should declare bankruptcy rather than rely on a federal government bailout. And state and local budgets are being hammered by reduced tax revenue and higher spending. But very unlikely that federal government will do nothing and just let a bunch of municipal bankruptcies happen.

Nevertheless, I'm worried a lot about my position in a municipal bond fund (Fidelity's Minnesota Municipal Income Fund, FIMIX). For such a small yield advantage over Treasuries (compared to the risk), I'm doing a lot of worrying.... just for a fucking extra percentage point in after-tax yield? (Treasuries are exempt from state and local taxes, but are federally taxed. Out-of-state municipals are generally free of federal taxes but are taxed by your state. In-state municipals are generally free of both federal and state taxes).

Oh, I don't worry about it plunging into oblivion. But just a few percent drop caused by a few defaults and bankruptcies wipes out several years of any marginal yield advantage over safer alternatives -- such as Treasuries, and FDIC- or NCUA-insured CDs.

I know some point to the federal deficits / debt and says Treasuries are not super-safe either, but everything I've read is if comes to where defaulting is considered, they will always (despite things Trump said a few years ago) print the necessary money (the modern way, just making some electronic entries), rather than letting the U.S. government default.

I have corporate bond funds too, but that's a whole 'nuther post.

[Thunderbeast]

1. Trump and his Republicans are determined to bankrupt states.

They smile with glee at the prospect if defaulting on pension funds. I have no confidence that they will honor muni obligations.

Remember WPPS in the State of Washington. Millions wiped out with that nuclear project failure. Many losers were small investors who thought the bet was safe.

[progree]

2. Letting one particularly mismanaged one go down is a lot different than letting hundreds

go down. Including most/all states (not just cities and counties). And it's not just the bondholders that get zero'd out and that's the end of it. When state and local budgets have to be slashed by 1/3 or so and taxes raised... that affects a lot of voters, not just a relatively few bondholders.

[gibraltar72]

3. I happened to hear Richard Wolfe on Thom Hartmann show this afternoon

He explained in a way that finally got through to me what is happening in the markets. Maybe you can find it. The reason it resonated is because I saw it happen in the classic car market. I call it the law of the bigger fool. Rethinking my positions on a lot of this stuff based on that interview. I made my living in securities and investing not giving advice but that 30 minutes made some things very clear to me. I'm thinking if there isn't help a hell of a lot of munis could go very wrong. To simplify he stated there are no long term players pushing this market. Just looking for the next mark.

[lastlib]

4. What I've seen tells me that the safest investment right now...

...is (very) short-term treasuries--nothing longer than 1-year maturities; I'd look for mutual funds with portfolio durations of 3-6 months, heavy on 90-day T-bills and money-market instruments. Caveat is, with such short durations, yield will be very low, so they won't produce a lot of income; but principal will be fairly safe. If you're looking for income, the only place I see it is in the junk-bond market, where, of course, the risk is off the charts. Truth be told, I'm tempted to put most of my money into a savings account for the rest of this year--at least it'll be insured.
Of course, I'm not an investment advisor, so take me with a big grain of salt.

[safeinOhio]

5. I'm old, but still would like to make a little, so

I've moved a lot into cash as of 2017. If I had stayed more in the market I might have made a bunch, but hard to time markets. Never know when something really big might happen. So I sleep better with cash.
Been thru a lot of down turns and from what I've learned from study on the Great Depression, cash is king. Every thing gets cheap and time to buy.