I wanna be a bond vigilante

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awgee_IHB

awgee_IHB

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<p>Maybe thoughts on macro economics which we think might effect the housing market, but they aren't necessarily a headline, so we don't know where to post them? Or is it just me?</p>

<p>Anyways, here goes:</p>

<p>The muni bond market is having some trouble. MBIA, Ambac, FGIC, yada, yada, yada; the result of which is some muni bond auctions failed on Friday. The banks wouldn't stand buy the unsold bonds and some went for an effective yield of 10% and 11%! Geez! </p>

<p>So here is what occurs to me, vis a vis the housing market:</p>

<p>Why in world would anyone or any large investing institution buy CMOs or any mortgage related product when they can buy tax free munis with a yield of 10% or 11%? What would you buy?</p>
 
<p>ES - I am not sure, but I think you have to have a minimum of a million or so and usually you have to buy through an institution such as an insurance company, hedge fund, pension fund, ...</p>

<p>Or maybe you just have to have the right broker, but you won't get the same effective yield.</p>
 
<p>I dunno. But, let me ask you a question which is more to my point.</p>

<p>If you had your choice between tax free munis paying 10% or a mortgage paying 7%, which would you buy? Or maybe already answered through the direction or your questioning?</p>
 
Tax free munis I would think since I'm getting a tax-free adjusted return and the return is higher than the 7%. Plus, I bet that a municipality is a lot more reliable debtor than an individual. It's a composite of well-diversified individuals.
 
Awgee,





You are logic is indeed playing itself out. Investors aren't buying mortgages right now. The only mortgage bonds selling right now are the FNMA and FHLMC Bonds. If someone would be interested in buying mortgage bonds they would be paying 30% below par for a PRIME mortgage bond.





The secondary market for these securities is absolutely non-existent right now. Imagine the assembly line at Ford's Taurus plant. All of a sudden the consumer demand for Taurus stops, but the factory cannot shut down completely. They can only slow the production of cars. Now the factory is forced to hold the newly made vehicles somewhere, cross its fingers, hold its breath, and hope that people will start to buy the Taurus again. At some point something has to give. The demand comes back with a vengeance, or the factory is eventually forced out of business.
 
Good point, but that's still a great return on something that was considered to be a pretty sleepy investment a few years ago. Actually, I would say it's a fantastic return. I've got to think there's some overcorrection there, no sign that I can tell that municipalities are going to start going bankrupt.
 
<p>Sorry lawyerliz, I meant to respond and I hit the "thanks" button. Not that I am not grateful, but here is my response.</p>

<p>Most munis are federal income tax exempt and some are also state income tax exempt. Wierd huh? And even wierder, US savings bonds are state income tax exempt, but do incur federal income tax liability on the interest paid.</p>

<p>This is why wealthy folks buy munis. Tax-free is a great deal if you are at the highest marginal tax rate. This is how Buffett complains that his effective tax rate is lower than his secretary's.</p>
 
<em>Be careful with tax-free munis. We bought some AAA rated bonds and even they have gone down 10%.





</em>That is how a bond works. They sell at par 100 or 1000, and return say a rate of 10%. If you buy below par the rate or yield to maturity is higher than 10%, and if you buy above par the rate or yield to maturity is less than 10%.





So, if you were to buy those bonds now, below par, you get a nice rate. Then, if they go back up in value, you made an even wiser investment.





BTW, muni bonds really do not need insurance, as they rarely default. IMO, muni bonds are way undervalued right now. But, I am nutter, so my opinion is only worth two nutter butters.





<a href="http://www.investinginbonds.com/marketataglance.asp?catid=32">Linky for some muni bond info.</a>
 
<p><em>That is how a bond works. They sell at par 100 or 1000, and return say a rate of 10%. If you buy below par the rate or yield to maturity is higher than 10%, and if you buy above par the rate or yield to maturity is less than 10%.</em></p>

<p>Husband is in finance - researched a lot before we bought this particular bond. We thought we would be getting around + 11%. We were told there were a lot of tobacco lawsuits that brought it down about - 10%. Husband isn't concerned at all - just me. </p>
 
The issue is with the bond insurers and not the muni bonds themselves. I think the Municipal bond market is taking an unfair beating as well. The problems in the debt markets are associated with the accurate pricing of risk of the bonds secured by collateralized debt obligations. Muni bonds are your traditional government bond so they don't really have anything to do with mortgages per se.





Unless failed/slow property tax collection has an effect on a municipalities ability to make good on its bonds. What's the likely hood of that happening, specifically in California? I believe that OC as technically bankrupt in the mid '90's but didn't default on any of its bonds, correct?
 
<p>The total non-borrowed reserves of the federal reserve member banks are now negative, and have been for a week or so.</p>

<p>Just curious, now many folks are concened? </p>
 
It's really scary when you realize this has never happened before to this scale in our nation's history. The US banking system is now essentially bankrupt. They have however been morally bankrupt for some time.
 
Not to go off topic but preferred stock works very similar to bonds other than the position you are in if the company goes BK. I looked at some GS.A, GS.B, and GS.C a few months back.
 
http://financialsense.com/fsu/editorials/andros/2008/0215.html








<img alt="" src="file:///C:/DOCUME~1/RACQUE~1/LOCALS~1/Temp/moz-screenshot-20.jpg" /><img alt="" src="file:///C:/DOCUME~1/RACQUE~1/LOCALS~1/Temp/moz-screenshot-21.jpg" />reserves since August from the Saint Louis Federal Reserve:

<p class="text"><strong style=""><u><img width="485" height="358" v:shapes="_x0000_i1025" src="http://financialsense.com/fsu/editorials/andros/2008/images/0215.h30.jpg" alt="" /></u></strong></p>



<p class="text">Now let’s take a look at borrowings since the 1920 from John Williams at <a href="http://www.shadowstats.com/"> www.shadowstats.com</a>:</p>



<p class="text"><img width="485" height="351" v:shapes="_x0000_i1025" src="http://financialsense.com/fsu/editorials/andros/2008/images/0215.h31.jpg" alt="" /></p>

These charts are nothing more then a reflection of a RUN ON THE BANKS, domestic and international. The US banking system would be closed at this point, had the Temporary Auction Facility not been created. It is clear that this technique was imported from the ECB (European central bank), which has lent about $500 billion euros of the same since November 2007.
 
<p>Holy $hit!</p>

<p>I think I want to go hide under the bed or in the closet.</p>

<p>Canned goods, anyone?</p>

<p>Or, could it be, that reserves don't matter?</p>
 
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