Author Topic: Help me understand municipal bond funds (MUB, VTEB, TFI)  (Read 1674 times)

justostash

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Help me understand municipal bond funds (MUB, VTEB, TFI)
« on: May 06, 2018, 02:18:19 PM »
A fair portion of my stash is in muni bonds. But sadly, I don't really understand them too much.  I know they pay dividends. I know that the dividends can be tax exempt. One thing I don't quite understand is how is the price set on these funds?  Is it just supply/demand?  Or is it based on interest rates?  And how is the dividend determined?  What does one expect the price per share and dividend yield of muni funds to do during a time of fed interest rate hiking? Please excuse my ignorance, and thanks for any help!

MustacheAndaHalf

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Re: Help me understand municipal bond funds (MUB, VTEB, TFI)
« Reply #1 on: May 07, 2018, 10:25:05 AM »
You'll want to learn about "duration", which represents a bond's response to rising yields.  While it's an oversimplification compared to a yield curve, it's a very helpful way of considering all the fund's bonds with just one number.

According to Vanguard's website, VTEB (Municipal Bond ETF) has a 30-day SEC yield of 2.56% with a duration of 5.6 years.  Let's assume all bond yields move in sync, and say they just rose 0.25%.  That means VTEB's bonds are old news, with a yield worse than new bonds.  So VTEB takes an impact equal to: 0.25% x -1 x 5.6 = 1.9%.  VTEB should lose -1.9% when yields rise by 0.25%.  If yields fall (-0.25%) it should gain 1.9% in value.  That's why duration is a useful simplification (in practice 2-year bonds and 30-year bonds do not necessarily move the same amount).

There's also the quality of the bonds, ranging from AAA to AA for high quality, A or BBB for corporate bonds, and then below that for junk bonds (or "high yield" or "below investment grade").  If you see a higher yield "for free", the bond market is too efficient for that - you're probably taking on additional risk.

Note muni bonds should be that significant in your portfolio until you approach retirement.  So more important than understanding bonds is checking if your bond allocation is appropriate for your expected retirement.  You can peek at Vanguard's target date funds to see if you're allocating too much or too little to bonds.
« Last Edit: May 07, 2018, 10:33:24 AM by MustacheAndaHalf »

justostash

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Re: Help me understand municipal bond funds (MUB, VTEB, TFI)
« Reply #2 on: May 07, 2018, 11:42:03 AM »
Thanks much for the replies.

So I'm 40 and I'm FIRE-ish, pre-FIRE, or whatever you want call teetering around my FIRE goal number. Working part-time consulting. About 15% of my stash is muni bond funds amongst TFI, VTEB, MUB. This is mainly due to automatic distribution by Wealthfront. Though I also more directly control almost half of my stash which more or less mirrors my allocations in Wealthfront.

So, it sounds like from the two comments by MustacheAndaHalf and L.A.S., muni funds may not be in my best interest at this point in my life? And also, perhaps not a great idea when fed rates will be steadily increasing over the coming years?