Why are tax exempt munis paying so much ??

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.

Note that since then, some of those insurance companies raised money.

i

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:

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

organizations on brink of bankruptcy pay high rates for money access

Andy comments

You can get a better idea by googling with keywords like "tax exempt municiple" and that will get you many on-line brokerage firms which list their offerings.

Or, you can call Morgan Stanley Smith Barney and ask for their municipal bond dept. They have many current issues that pay those rates.

My personal interest is in Texas muni or school bonds that are AAA and insured and backed by a taxing authority. There may be a universe of others out there that I don't know about, so I'm not the person to ask....

Andy in Eureka, Texas

With all due respect, I think you're paying too much attention to ratings and not enough to interest rate risk or genuine default risk.

AAA _and_insured says only that the insurer is AAA-rated. The bonds themselves could be junk (though they're likely still investment grade). States use insurers because they feel that the boost in ratings (by inheriting the insurer's rating) lets them reduce the yield of the offering by more than the insurance costs them. As Igor pointed out, the insurer's value may be overstated. But because insured bonds hide behind the insurer's ratings, you may not know how solid the underlying bonds are.

This writeup from California in 2002 illustrates that the market realizes the value (or lack thereof) of insurance.

Natural AAA bonds yield about 1/10% less than insured AAA bonds - reflecting the suspicion about both the insurers and the underlying bonds. In fact, insured AAA bonds had virtually as high a yield as AA bonds (uninsured). If you're looking for safety, remember that natural AAAs almost always yield less (reflecting the greater risk in the insurer than in a true AAA bond).

To find 4.5% munis, you are looking well out on the yield curve. I ran a quick check at Fidelity and found no Texas munis yielding 4.5%+ in under 12 years. General rule of thumb is that going beyond 10 years is for speculation, not for long term holding - the interest rate risk (of a bout of inflation, high interest rates, etc.) isn't worth the small increase in yields you get beyond that point.

Personally, I've been buying munis in the 8-10 year range, because I'm willing to accept a certain amount of interest rate risk, and don't expect rates to rise so far, so fast, that I'll get badly burned in that time frame. Also, I don't foresee a need for the money sooner than that. One won't get 5% tax free there, but one (or at least I) will be able to sleep better without worrying as much about long term inflation or defaults.

Mark Freeland snipped-for-privacy@nyc.rr.com

Andy comments:

Thanks for the info. I'll certainly consider these things in future investments.

Andy in Eureka, Texas

On Jun 26, 9:42 am, Douglas Johnson wrote: [own snipped]

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.