WatchWith opportunities drying up in real estate, and my feeling that this recovery will be short lived, I have decided for the first time in a VERY long time to start putting money in California tax free bond funds.
Obviously this move carries risk, but at this point I'm convinced that there will be no fundamental changes in federal tax policy over the next 4-8 years, and therefore no changes in the direction of wealth disparity.
I agree with Warren Buffett that state obligations will never be allowed to go bankrupt. (most munis are insured anyway) If anything, both Romney and Obama will be MORE likely to authorize bailouts than Bush.
I'm going with NCO (6% return) and NUC. (6.3% return) I welcome arguments why this is a stupid thing to do.
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California doesn't have to go bankrupt for investors to be force-fed a writedown.
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Davis, CA
Kramer : Municipal bonds Ted, I'm talking double A rating. . .
the best investment in America.
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46 male
Menlo Park, CA
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Why not buy the CA bonds directly, instead of in some mutual fund that can screw you with churn, fees, and large unwanted taxable distributions (which has happened to me)?
If the underlying bonds don't pay the same rate as the mutual fund, I'd be suspicious that they're doing something too funky to get that 6%.
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47 male
Lafayette, CA
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Patrick says
They are putting 20% in non-insured, non-rated bonds. It's a common practice to boost yield with the assumption that most if not all will remain solvent, and even if one or two go bankrupt it isn't going to affect overall profits that much.
Buying bonds directly has risks too. What if you bought Stockton? A managed fund reduces overall risk.
http://www.reuters.com/article/2012/02/29/stockton-default-idUSL2E8DT0KL20120229
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tjjenkins says
Greece didn't have to go bankrupt for investors to be force-fed a writedown.
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It's a little long, dotcha think?
You were right above, when you identified the constitutional constraint as the major difference between Greece and California. In most other ways you list they are or will be similar. But when you make the argument that this distinction is key, you are ignoring the soul-crushingly awful fact that our constitution --presumably unlike that of Greece-- is only slightly less mutable than your middle school homeroom's blackboard. It is perenially vandalized to advance whatever the populist craze of the day happens to be.
Hence Article thirty five, Medical Research; among others. Heck, we're one of the most liberal states in the nation, and we managed to outlaw gay marriage through constitutional amendment. If you think voter confusion was decisive in that matter, then you can even call that an accident.
Look, I love my state dearly. And it's wonderfully successful, in its way. It owes that success to the universally inoffensive climate, and to an unabashedly statist view of higher education. No one moves here for the sanctity of our political institutions, and I wouldn't invest based on them, either.
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Hard to say. Republicans will probably "play politics" with any potential California bailout like they did during the whole debt ceiling fiasco. I suppose the end result is anyone's guess.
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Davis, CA
Because California is soon going to GET WHAT IT DESERVES and shake, then bake, then slide into the ocean. Then it'll go bankrupt. Somewhere in there is Mad Max. Or maybe I mixed up the order on that.
That's what all my East Coast relatives relate to me with a twinkle in their eye at least.
I've been long California tax-free bonds for a while through Fidelity fund FCSTX.
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Seems like a huge gamble, they are really expensive now at their peak. Is the 6% return guaranteed?
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Lafayette, CA
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FortWayne says
Nope, returns on California municiples is currently around 5%, which is a guaranteed rate barring default or redemption. The discrepancy is either lag time in the fund catching up to yields, higher risk investments which the fund states are limited to 20%, or something else which I'm not aware of.
Here's a quick historical. The 1-year spike is due to appreciation of the fund and NOT related to yield:
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Lafayette, CA
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FortWayne says
Not really. The recent dip is courtesy of the "THE DOLLAR IS CRASHING AND CALIFORNIA IS GOING BANKRUPT!" crowd.
A fund like this is only about yields. Volatility on principle is simply something that smooths out over long periods of time. Keep in mind that if Munis were considered as safe as treasuries, prices would double.
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Vicente says
Striker...Striker...Striker... *punch*
...Ted Striker?
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iwog says
Yes, I think that is right if you are in it for the long term and dont need to cash out. I have had a large position in CTEZX ( long term muni fund not restricted to CA.) for many years it is around a 4% yield. It is currently at or near a 5 year high. I suppose this is driven by low interest rates and relative safety. Not sure I would buy more at this level. I saw it drop like a rock in 2008 but less % wise than the stock market. None the less the bottom was still about 20% below where I bought it, so there is principle risk and I think more so in CA Munis.
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Santa Cruz, CA
Vanguard tax free high yield.
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"They're not junk-bonds, Julia...they're called 'high-yield' bonds. I don't say you're in 'junk-waitressing'..."
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I have been investing in CA muni bonds for many years now. I continue to believe they are a good investment for many reasons (note: most of these comments are directed at GO's):
1. The rate of return on CA long bonds is about 4.25% right now. I am currently in the 35% federal and 9.3% (or whatever it is now) state tax bracket. Doing the match, this works out to a yield of more than 7% on a tax adjusted basis. Pretty good.
2. Taxes are (probably) going up on high incomes. The top bracket is likely to hit 39.6% federal and over 10% for state. That will increase my tax-adjusted return over corporate bonds or dividends, which will soon be taxed at these higher rates. Moreover, because these bonds will become more attractive to high income residents of California, the underlying value of these assets will increase.
3. The favorable 15% tax on dividends will probably be replaced with a 39.6% tax rate if proposals to tax dividends as ordinary income are passed. This will make seeking an income stream from equities much more difficult, and, in turn, increase the value of munis.
4. California will not default. Note that the state Constitution mandates that GO's get payed after education, and before everything else. In other words, for bonds not to get paid, the amount of revenue coming in would have to fall to the point where only education and GO's could be paid. We are nowhere near that point. Indeed, revenues could fall by 25% and there would still be enough money to pay bondholders. Other things that are probably more important (police, fire, [fill in whatever you think is important here] etc.) might not be paid but the state Constitution mandates that these things go unfunded if necessary to pay bondholders. Other states do not have a similar provision and this is often overlooked when the saftey of CA bonds is reviewed.
5. California will also not default because the rest of the world (and the federal government) would never let that happen. California, as a sepatate economy, is one of the world's largest. Much, much larger than Greece. Yet, look at the absolute panic to save Greece from default. A default by a much bigger entity like CA would never be allowed to occur because it would drag the whole world down.
6. High income residents of California have a disproportionately large say in what happens in California. That is how it works pretty much everywhere in the world. Since most bonds are held by high income residents, and default would be at their expense. Note a likely outcome given their influence on government policy. Note that it does not matter which party is in power - - both parties are beholden to their largest donors.
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A few more comments about funds (or ETF's) vs. individual muni bonds. Advantages to both. Since individual muni bonds do not trade over an exchange like equites, they generally must be sold through a full service broker with a 1% commission. Not great, but not a problem if you hold them to maturity. I hold about 70% on my muni bond assets as individual bonds - - the portion I plan to hold to maturity. For shorter term bonds. I like CMF. Trades easily, with little to no commission and fairly low mgt. fees. Also, and this is important, CMF buys only "non-AMT" munis - - not all munis in CA are non-AMT even if they are otherwise tax free under the code. A couple of negatives on ETF's: they are not "no fee" like an individual bond held to maturity. Also, they usually hold quite a few non GO's which do not have the same default protections. (Although, unlike GO's, much of CMF's portfolio are insured, for what that's worth).
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msilenus says
The key difference here is that Greece does not have a constitutional obligation to pay its bondholders at the expense of everybody else. Greek lawmakers had the legal power and ability to default, and that gave them leverage to force a haircut on the bondholders. In effect, they could say take X on the dollar or we will default. California does have a constitutional obligation to pay its bondholders (at least with regard to GO's) at the expense of other creditors (except education). California therefore lacks the legal power to default unless and until it has eliminated all funding for everything (except education). Needless to say, this will never happen. California does not have anywhere near the leverage in dealing with its bondholders as Greece does.
Note too that states, unlike cities, counties, and private persons and corporations, do not have the legal option of bankruptcy. They were intentionally excluded from the bankruptcy code. This further reduces CA's leverage over bondholders in a fiscal crisis.
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7% return after tax is pretty damn good right now.
It compares nicely to buying up rental homes with all cash (which would return more but are more work/risk).
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tjjenkins says
Do you live in California?
This is our state constitution's table of contents. Does anything look odd to you?
http://www.leginfo.ca.gov/const-toc.html