Author Topic: Investing in Muni Bonds after the rate hike?  (Read 666 times)

TwistedEther

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Investing in Muni Bonds after the rate hike?
« on: September 25, 2018, 09:32:34 PM »
I am new to muni bonds. I want to invest some money in tax-exempt state muni bond for the state I reside in (VCLAXhttps://investor.vanguard.com/mutual-funds/profile/vclax). I would appreciate if anyone can answer these questions for me?

1. Would you know how soon can I invest in a municipal bond after fed rate hike to take advantage of higher coupon rates? My understanding here is this - Typically newer bonds issued after rate-rise generate more interest income each month relative to previously issued securities.  I am assuming that VCLAX purchased after rate hike would also have a higher rate compared to purchasing the same bond before the rate hike.  I could be completely wrong with my assumption here since my understanding about bonds is abysmal. So please feel free to correct me.

2. Should I be aware of any potential dangers?  Would you suggest something else that is a similar-styled investment?

3. I take it that I can sell these bonds anytime.  Or do I have to hold them for a minimum holding period?

4. How would I know if I will be exposed to AMT? 

Radagast

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Re: Investing in Muni Bonds after the rate hike?
« Reply #1 on: September 25, 2018, 10:23:13 PM »
I am new to muni bonds. I want to invest some money in tax-exempt state muni bond for the state I reside in (VCLAXhttps://investor.vanguard.com/mutual-funds/profile/vclax). I would appreciate if anyone can answer these questions for me?

1. Would you know how soon can I invest in a municipal bond after fed rate hike to take advantage of higher coupon rates? My understanding here is this - Typically newer bonds issued after rate-rise generate more interest income each month relative to previously issued securities.  I am assuming that VCLAX purchased after rate hike would also have a higher rate compared to purchasing the same bond before the rate hike.  I could be completely wrong with my assumption here since my understanding about bonds is abysmal. So please feel free to correct me.

2. Should I be aware of any potential dangers?  Would you suggest something else that is a similar-styled investment?

3. I take it that I can sell these bonds anytime.  Or do I have to hold them for a minimum holding period?

4. How would I know if I will be exposed to AMT?
1. In theory the size and probability of a rate hike should be priced into the bond market already, so you will not come out ahead by waiting. After a rate hike the probability of the paths not taken will drop to zero, so there generally will be a small correction one way or the other, but good luck guessing in advance.
2. Not much danger here, until California declares bankruptcy in the next Great Financial Crisis. See AMT-free VWLUX which has better similar credit quality and much better (multi-state) diversification to see if it makes sense in your tax situation. Also VWALX, which has riskier assets but is not concentrated in one state and has a higher yield (but maybe AMT, ouch). Some gurus recommend also having treasury bonds, because sometimes like 2008 muni bonds will crash at inconvenient times.
3. The same rules apply as other Vanguard mutual funds.
4. Above my pay grade. The VCLAX page says 0.0% AMT.

« Last Edit: September 25, 2018, 10:29:43 PM by Radagast »