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Are Municipal-Bonds Always a Safe Haven

edited March 20 in Other Investing
https://www.morningstar.com/articles/973066/are-municipal-bonds-always-a-safe-haven

Are Municipal-Bonds Always a Safe Haven?
This market hasn't been immune to trouble stemming from the coronavirus-related volatility


Probably not...badly hammered past 6 wks

Comments

  • Easy, NO. look at YTD performance.
    I try not to use the word SAFE but volatile.

    When rates are going up quickly Treasuries are one of the worse categories
    When rates are going down, Treasuries are one of the best categories.
    When a black swan hits, Treasuries are one of the best categories.

    And when Treasuries are good longer term will do even better and why TLT is better than Vanguard Short-Term Treasury ETF (VGSH). See (chart)
  • edited March 20
    Yes, John, of course they are. Why don't you ask some more silly questions?
  • edited March 20
    Hi sir @old_joe. Perhaps you are right sir,

    If near retirement, probably need to sell everything Monday and put in 100%cash/CDs...nothing is working

    If still have many years probably continued to buy and DCA

    Maybe best time to buy new car or home in 4-6months if there is severe USA Recession

  • I'm old enough to remember when NYC didn't pay the coupons on its bonds. (Of course, all the bond houses were sending out messages that NYC had to pay the bond holders before it paid the cops, fire fighters and garbage collectors. That may have been true legally, but it wasn't true either politically or practically.) This all happened in 1975.

    For all you young'uns, what happened was that there was a moratorium on NYC payments, the coupon rate was reduced & it was eventually paid off. If history is your hobby, you can read about it at https://en.wikipedia.org/wiki/History_of_New_York_City_(1946%E2%80%931977)#Fiscal_crisis The hero who arranged all this was Felix Royatan.

    So, bottom line, yes things can go wrong with munis.

    And we should expect states, etc. to have reduced income from taxes as the virus decreases economic activity.

    Finally, if you want to know how vulnerable your bond fund is to changes in interest rates, look for its DURATION. The duration is the average maturity of all the payments a bond will make (including its coupon payments). It's a bit less than the average maturity of the fund or bond. The magic about duration is that a change of X% in interest rates results in a change of (duration) times (X%) in the principal value of the bond - and in the opposite direction. So if interest rates rise by 0.5% and the fund has a duration of 5 years, then the principal value goes down by(5)(.5%) = 2.5%

    That change is independent of credit risk - if the issuer of the bond becomes less credit worthy, then there will be a change caused by that too.
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