NYC municipal bond
June 25, 2005 10:02 AM Subscribe
I want to buy New York City municipal bonds. How is the best way to do this?
I have an online account Ameritrade
I have an online account Ameritrade
If you're talking about investing less than a few hundred thousand dollars, you may be better off buying a bond fund than buying individual bonds from a broker. Muni markets are hugely inefficient and opaque. Retail clients at brokerages often end up paying 1% or more in spread to buy an issue. Vanguard's new york bond fund VYFXX is where I'd start looking.
posted by Nelson at 11:11 AM on June 25, 2005
posted by Nelson at 11:11 AM on June 25, 2005
Ooops, sorry, VYFXX is a money market, not a bond fund. Here's the list of all Vanguard funds.
posted by Nelson at 11:15 AM on June 25, 2005
posted by Nelson at 11:15 AM on June 25, 2005
I assume the reason you want to is because the coupon income is tax-free (capital appreciation on bonds selling at a discount is not). The simplest way to go about this is a municipal bond fund, which are (usually) broken out by state. Some long term NY muni funds, or Morningstar's screener (Fund group: Muni, Category: NY long/intermediate or short). You'd want to cross-check it with what's available at Ameritrade's fund supermarket.
Another way is through a closed-end fund. These trade on exchanges like a stock, but will trade at a premium or discount to their net asset value (NAV) (unlike an open-end mutual fund or ETF which will trade at or extremely close to NAV) to reflect the supply/demand of the fund's shares. Here's a list of them and ones with "New York municipal" would be of more interest to you, since the dividend would be tax-free.
But if you want to actually trade individual bonds, you can do it with Ameritrade, though it will be broker-assisted (and this option could well end up being more expensive than the mutual fund option, depending on how much you want to buy). You'll need to have a really good idea of what you want to buy - down to the CUSIP number of the bond issue you want - and should have a good idea of the price at which it was most recently traded in small volumes (this is an excellent introduction for an individual investor)
(Bonds are pretty simple if they are trading at par/100% of face value, guaranteed to be paid back, will be held until maturity and will never be called early, but that's a rare exception rather than the rule. In every other case, it helps to know a little bond math and, IMHO, the most elegant book written on this is "Inside the Yield Book" by Sidney Homer and Martin Leibowitz)
posted by milkrate at 11:40 AM on June 25, 2005
Another way is through a closed-end fund. These trade on exchanges like a stock, but will trade at a premium or discount to their net asset value (NAV) (unlike an open-end mutual fund or ETF which will trade at or extremely close to NAV) to reflect the supply/demand of the fund's shares. Here's a list of them and ones with "New York municipal" would be of more interest to you, since the dividend would be tax-free.
But if you want to actually trade individual bonds, you can do it with Ameritrade, though it will be broker-assisted (and this option could well end up being more expensive than the mutual fund option, depending on how much you want to buy). You'll need to have a really good idea of what you want to buy - down to the CUSIP number of the bond issue you want - and should have a good idea of the price at which it was most recently traded in small volumes (this is an excellent introduction for an individual investor)
(Bonds are pretty simple if they are trading at par/100% of face value, guaranteed to be paid back, will be held until maturity and will never be called early, but that's a rare exception rather than the rule. In every other case, it helps to know a little bond math and, IMHO, the most elegant book written on this is "Inside the Yield Book" by Sidney Homer and Martin Leibowitz)
posted by milkrate at 11:40 AM on June 25, 2005
Milkrate's not wrong, but he's making it far too complicated. If you want NYC paper, call your broker, and ask him what paper is at what yield. There's a lot of NYC paper out there. I'd be very surprised if the yield you were quoted wasn't all-in, net-net-net, because brokers usually sell bonds with a markup, not a commission. By law, he'll quote you YTW, or yield to worst, which will (mostly) take into account the risk of the issuer calling the bonds away from you prior to maturity.
Also, some risk-averse investors prefer General Obligation Bonds ("G.O.'s") to revenue bonds-- regardless of what the rating agencies say. In other words, MBIA might insure a NYC hospital bond. The bond would have a triple-A rating because of the insurance. An investor (me included), might prefer a regular ole NYC G.O. bond, because instead of being backed by hospital revenue or an insurer, the bond would be backed by the general taxing power of the New York Leviathan.
I've traded over a billion dollars in bonds over my career. Send additional questions to my email, if you wish.
PS-- You can get slaughtered in a bond fund.
posted by Kwantsar at 2:54 PM on June 25, 2005
Also, some risk-averse investors prefer General Obligation Bonds ("G.O.'s") to revenue bonds-- regardless of what the rating agencies say. In other words, MBIA might insure a NYC hospital bond. The bond would have a triple-A rating because of the insurance. An investor (me included), might prefer a regular ole NYC G.O. bond, because instead of being backed by hospital revenue or an insurer, the bond would be backed by the general taxing power of the New York Leviathan.
I've traded over a billion dollars in bonds over my career. Send additional questions to my email, if you wish.
PS-- You can get slaughtered in a bond fund.
posted by Kwantsar at 2:54 PM on June 25, 2005
For what it's worth, furthermore, Fidelity's long-term NY Muni Fund has an expense ratio of .67% per annum, and a duration of 7.
So, you can have your broker make a 1% markup on you when you buy an individual bond, or you can pay Fidelity .67% every year.
The duration measure shows, roughly, what you'd lose in principal if the yield curve experienced a parallel shift, up one percentage point. Rates go up 2%-- kiss 14% of your investment goodbye.
Considering that most people buy bonds to know exactly what they are going to get, and when they're going to get it, bond funds are a sorry choice compared to bonds. All that bond funds give you, really, are liquidity and diversification. If you're comfortable tying your money up for a specified period, and you buy high-quality paper, it's stupid to pay for liquidity and diversification.
posted by Kwantsar at 3:18 PM on June 25, 2005
So, you can have your broker make a 1% markup on you when you buy an individual bond, or you can pay Fidelity .67% every year.
The duration measure shows, roughly, what you'd lose in principal if the yield curve experienced a parallel shift, up one percentage point. Rates go up 2%-- kiss 14% of your investment goodbye.
Considering that most people buy bonds to know exactly what they are going to get, and when they're going to get it, bond funds are a sorry choice compared to bonds. All that bond funds give you, really, are liquidity and diversification. If you're comfortable tying your money up for a specified period, and you buy high-quality paper, it's stupid to pay for liquidity and diversification.
posted by Kwantsar at 3:18 PM on June 25, 2005
Fidelity's long-term NY Muni Fund has an expense ratio of .67%
Yeah, right. But why go to Fidelity? Vanguard's expense ratio on their NY LT bond fund (VNYTX) is .14%. With yields around 3.3%, that extra .50% in fees seems really nutty.
Kwantsar's right - bond funds aren't the same thing as bonds. You can hold a bond to duration, but it's relatively more expensive if you need to liquidate it. You should particularly understand what that means right now, when everyone expects interest rates are going to go up.
It's kind of complicated, mert, sorry about that. But please do your research; if you just call your friendly broker and say "sell me some bonds", you're likely to pay an expensive markup.
posted by Nelson at 6:32 PM on June 25, 2005
Yeah, right. But why go to Fidelity? Vanguard's expense ratio on their NY LT bond fund (VNYTX) is .14%. With yields around 3.3%, that extra .50% in fees seems really nutty.
Kwantsar's right - bond funds aren't the same thing as bonds. You can hold a bond to duration, but it's relatively more expensive if you need to liquidate it. You should particularly understand what that means right now, when everyone expects interest rates are going to go up.
It's kind of complicated, mert, sorry about that. But please do your research; if you just call your friendly broker and say "sell me some bonds", you're likely to pay an expensive markup.
posted by Nelson at 6:32 PM on June 25, 2005
What Kwantsar said about costs and being able to mark your positions as held to maturity, plus, the following: it's a lot safer to buy individual municipal securities in retail quantity now than it used to be, because the pricing is more transparent and the dealers are far less able to give you bad executions, thanks to regulatory crackdowns. Your rich uncle and other kibitzers may not be aware of this, and thus might urge you into bond funds on the basis of a conventional wisdom which is no longer accurate.
You still need to do a lot of careful work in choosing the bond you want. Don't underestimate the work in this...
posted by MattD at 6:40 PM on June 25, 2005
You still need to do a lot of careful work in choosing the bond you want. Don't underestimate the work in this...
posted by MattD at 6:40 PM on June 25, 2005
You can hold a bond to duration,
Not an attack, and sorry to be a pedant, but you hold bonds to maturity, not to duration.* The maturity date is the date you (usually) get your last coupon and your principal. Duration is the weighted average maturity of a series of cash flows.
Trying to remove confusion, not add to it.
*Duration = Maturity only for zero-coupon bonds, and, still, no one ever talks about duration unless he is discussing interest rate sensitivity.
posted by Kwantsar at 7:18 PM on June 25, 2005
Not an attack, and sorry to be a pedant, but you hold bonds to maturity, not to duration.* The maturity date is the date you (usually) get your last coupon and your principal. Duration is the weighted average maturity of a series of cash flows.
Trying to remove confusion, not add to it.
*Duration = Maturity only for zero-coupon bonds, and, still, no one ever talks about duration unless he is discussing interest rate sensitivity.
posted by Kwantsar at 7:18 PM on June 25, 2005
This thread is closed to new comments.
If you buy lots of ten or twenty-thousand in face value, and you need to sell before maturity, be prepared to take a haircut.
If you want to be frugal, call Ameritrade and ask if they ever underwrite (or participate in the selling group for) NYC munis. If they don't, ask for the bond desk and get a list of their inventory.
posted by Kwantsar at 10:33 AM on June 25, 2005