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ETF Individual Bond Municipal Bond Mutual Fund News

November 2011 Municipal Bond and Tax Free Mutual Funds News – Property Tax Refunds, Fidelity FCSTX Report

municipal bonds

This month saw more of news about financial market volatility.  The Month’s municipal bond news included:

  • 11/04: Tax Win Inspires Copycats – – Affluent Lake Tahoe homeowners won a record $43 million in property tax refunds and are trying to get more. The problem was that Washoe County assessed home values using their own techniques instead of market values. Other counties around the US may be susceptible to this same tactic, significantly affecting the finances of a given county.
  • 11/04: Fidelity California Short-Intermediate Tax-Free Bond Fund (FCSTX) Semiannual Report – Municipal bonds generated solid gains for the six-months period ending August 21, 2011 mainly because of investor demand and reduced muni bond supply. Fundamentals improved and expenses were slashed in many municipalities. Even out of state investors purchased California munis. One problem area was their Puerto Rico muni bond holdings.
  • 11/10: Jefferson County, Alabama finally filed for bankruptcy. This is the largest municipal bankruptcy yet and was no surprise. Problems were due to bond issuance deals to upgrade its sewer system that soured amid widespread corruption, bribery and fraud charges that led to some 22 convictions.
  • 11/11: Smart Money’s Jack Hough thinks munis are worth a look. He is bullish due to recent strength in lite of Jeffereson Country bankruptcy and Euro zone problems, and other factors.
  • 11/11: Superdowngrades or multi-notch downgrades of muni bonds are occuring because ratings firms do not review each bond’s finances regularly.
  • 11/14: Cities are using Muni Bond money to pay for other things. Audit Investigations are going on and lawsuits are flying.
  • 11/23: Muni Bond ETFs have held there own and are slowly growing more popular.  Mutual funds still dominate the category.
  • 11/25: Harrisburg had their bankruptcy petition thrown out by the court as they violated state laws by doing so. Pennsylvania now will pursue a plan to put Harrisburg into state receivership.
  • 11/30: Jefferson Counties’ bankruptcy will test whether ‘previously safe’ revenue muni bonds will continue to get paid while in bankruptcy.
Municipal Bond Mutual Fund

Fidelity Municipal Bond Mutual Fund Credit Quality reduction

fidelity tax-free municipal bond fund

Two Fidelity Municipal Bond Mutual Fund recorded a Credit Quality reduction.  The FSTFX and FCSTX tax-free bond funds both have average credit qualities of A down from AA, but still investment-grade. Morningstar’s fixed income style box has the fund falling to a medium quality from high-quality. This is not a good sign, but not a surprise because of the deteriorating credit quality of many municipal bonds. We now need to determine whether we would like to exchange into a different municipal bond mutual fund that has a higher credit quality.

Fidelity Short-Intermediate Muni Income Bond Fund (FSTFX)
Exp Ratio: 0.50% – Duration: 2.7 Years – Average Credit quality: A – 2010 Q4 return: -1.1%
Morningstar Rating: 4 Star
Note: Reasonable duration but slightly high expense ratio. Vanguard doesn’t have a California municipal bond mutual fund with this short duration.

Fidelity California Short-Intermediate Term Tax Free Bond Fund (FCSTX)
Exp Ratio: 0.35% – Duration:  3.1 Years – Average Credit quality: A – 2010 Q4 return: -1.39%
Morningstar Rating: 4 Star
Note: Reasonable duration and expense ratio. Vanguard doesn’t have a California municipal bond mutual fund with this short duration.

When running a Morningstar fund screen looking for short-term municipal bond mutual funds with expense ratios equal to or less than 0.50%, no loads, average credit quality of AA or better, and durations of less than five years, we find the following funds:

Morningstar municipal bond fund screener

If you drill down and closely examine this the small list, you will find very few viable options. The Goldman Sachs fund has a $10 million minimum while the two PIMCO funds have a $1 million minimum. The DFA fund is only sold through advisers.

The to Vanguard municipal bond mutual funds options (VMLTX, VWSUX) are known entities that we have owned.

Municipal bond Mutual fund possibilities

The Columbia short term municipal bond Z fund (NSMIX) is a possible candidate and is available at Schwab and Vanguard but not Fidelity Retail. Its performance over the last tumultuous three months puts itself between the ultrashort Vanguard short-term tax-exempt municipal bond fund and longer duration funds like the Vanguard limited term tax-exempt fund or Fidelity short/intermediate-term tax exempt fund.

Glenmede Municipal Intermediate Mutual fund (GTCMX) is a four star municipal bond fund that is only available in a very limited number of places. The company is primarily an East Coast investment and wealth management firm.

Education Individual Bond

Municipal Bond Trading Example

municipal bond quotes

In our municipal bond educational, we have stated that bond trading is an opaque art unlike stock trading. There are many hidden traps and bad deals with high markups abound. Clearly if you are trading large blocks of bonds like the big institutions, you will receive the best price. Individual investors will pay a markup for smaller lots of bonds. It is possible to pay $10,000 for bonds that are broker bought for $9000 earlier in the day. A goal is to shoot for a less than 2% markup.

Online Bond Trading

Charles Schwab  municipal bond inventory

Unlike stocks, online bond trading with the major brokerages will not yield the best results. Online brokers charge a low $1.50 to trade a bond, but the price of the bond has already been marked up. Things get even worse when trying to sell a bond nearing maturity. One area where markups are not as bad are with new issues. California advertises many new issues on the radio, seeking individual investors, and advertising the fact that there will be no added markup.

Online Trading Example

Charles Schwab buy bonds, buy municipal bonds

We decided to document markups and show specific case, so investors can learn and avoid high markups. The example we use is heavily traded Los Angeles transportation bond, roughly 10 years out, maturing in 2021. This bond’ s CUSIP number is: 544712D82

We first Municipal Securities Rulemaking Board to find the official statement and financial information for this municipal bond and recent trades.  You can also visit to find the last trades for this bond. The last trades for this particular bond are around:101 showing yield of 4.1%

We check Charles Schwab to see how much they sell this bond for. We tried to purchase $25,000 of this bond and we receive a price of 103.76, a yield of 4.0%.. Comparing the Schwab price to the last couple transactions we noted above, we see that we are paying a 2.5% premium.

We run the same check that Fidelity Investments and find that they sell a bond for $103.665 when we ask for a $25,000 chunk. A slightly smaller premium than Schwab, and they even have a link that shows recent trades, so you can see the  transactions that 101. At least Fidelity lets you enter a limit price or limit yield.

At Vanguard, the price of the same bond is $103.665, with a him $50 commission on a $25,000 order. You cannot sell munis there.

Optimizing Bond Pricing

How can we minimize the markup? Pricing can vary widely and markup is less that bond brokers where you can set a price for haggle. It is best to have multiple accounts at different brokerages, some of which would be full service brokerages. It is most optimal to have at least one account at a major underwriter such as Citi, Goldman Sachs, J.P. Morgan, Morgan Stanley, Merrill Lynch, or Wells Fargo. There are usually regional firms that deal in bonds. In the San Francisco Bay Area these would include Stone and Youngberg and Alamo Financial.

Ask friends who they use, Google the firm and the broker. Call the firms office manager and ask who is a fixed income specialist is. Beware of brokers who sound like used car salesman.

Be sure to check out your new firm and broker checking the databases at:

Additional Related Municipal Bond Educational Articles:

What are municipal bonds?
How to Research Municipal Bonds
The Risks of Owning Municipal Bonds
How to Buy And Sell Municipal Bonds
Municipal Bond Mutual funds – Municipal Bond Managed Accounts
What Are Closed-end Municipal Bond Funds?

What are Municipal Bond Exchange Traded Funds or ETFs
How to Make a Municipal Bond Ladder
How to Select Municipal Bonds
Municipal Bond Trading Example
How to Perform Active Municipal Bond Management
Municipal Bond Books and Educational Resources