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Are Some Bond Fund Prices Stale?

I have long been skeptical of how fair bond fund prices are — or more accurately said, the potential ability for knowledgeable investors to “game” bond fund prices — in fixed income asset classes where liquidity isn’t great. Two asset classes that immediately come to mind are municipal bonds and high-yield corporate bonds. I finally got around to testing this proposition using daily returns data for a handful of different bond funds in these two asset classes. The findings confirm my suspicion.

Positive Developments for Municipal Bond Investors
Public pension underfunding at the state and local level has rightly received an enormous amount of attention over the past few years. Most public pension funds are significantly underfunded when pension liabilities are valued using economically reasonable assumptions. In fact, Moody’s has calculated total underfunding to be roughly $1.8 trillion as of 2011, meaning the total value of pension fund assets is roughly $1.8 trillion less than the amount these funds owe to current and future retirees. From a municipal bon....
Municipal Bond Fund Investors Are (Unfortunately) Selling Again

Over the past week, I’ve been reading a few pieces summarizing Detroit’s Chapter 9 bankruptcy filing. One piece noted the absolutely massive amount of outflows from municipal bond funds in June and July. In June, the Investment Company Institute (ICI) reported outflows of $16 billion, which is the largest monthly outflow ICI has recorded in the dataset I’m using. Further, ICI reports that to....

Deconstructing Municipal Bond Yields
Historically, when compared with comparable maturity Treasury bonds, municipal bond yields have been lower due to their federal tax exemption. Over the very long term, this yield “discount” has averaged about 25-30 percent. An interesting change, though, has occurred from about the start of the financial crisis to today.
 
Municipal yields have generally been about the same or higher than Treasury yields even before adjusting for tax exemption. The chart....
Examining Bond Market Risk
With interest rates on intermediate- and long-term bonds ticking up a good bit over the beginning of the year, many investors are refocusing on the potential risk within bond portfolios. (As one data point iShares 20+ Treasury ETF is down about 1.8 percent year-to-date.) For many bond portfolios, that risk can come from either interest rate risk or credit risk. Here I’ll focus on interest rate risk.

The potential interest rate risk in a bond or bond fund portfolio is largely determ....
Finding Good Yield Data on Bond Funds
You might think finding accurate bond fund yield information would be simple. From my experience, you’d be wrong. It’s incredibly difficult to sort through the myriad of yield measures published by the fund companies themselves or third parties like Morningstar, or even dictated by regulatory bodies like the SEC.

The Gold Standard: Yield-to-Maturity

A good rule of thumb is to ignore any yield measure other than yield-to-maturity (and possibly yield-....
More on Bonds Vs. Bond Funds
I was forwarded an article by Jane Bryant Quinn from 2011 arguing that individual bonds are generally a bad deal. She aptly notes that many bond ladders are inappropriately sold to investors by stock brokers, which I agree with, but many of her conclusions as to why bond ladders are bad are based on faulty assumptions. I’ll selectively cover her com....
Individual Bonds Vs. Bond Funds
I won’t pretend that it’s easy to sort through the mountain of available information arguing for or against bond funds relative to individual bonds. From my experience, I would say you should be skeptical of any article claiming that either of the two approaches is always the correct answer regardless of circumstances. In my opinion, a thorough analysis of the two choices yields a much more nuanced answer.
 
Investment Taxation in 2013
Now that we have a bit of certainty around taxation (in 2013 at least…hopefully…right?) I wanted to explore some of the high level implications.
 
Ordinary income and capital gains
 
The newly instituted 39.6 percent marginal federal tax rate and the Medicare surtax of 3.8 percent means the burden of short-term capital gains and ordinary income has ....
Science vs. Speculation in Post Crisis Bond Markets
This post is obviously a bit anecdotal, but I’ve been thinking about three prominent predictions from the past few years and analyzing those predictions relative to what the market was forecasting and what academic research had to say. The three predictions were:
  1. Interest rates would increase so, you should stick to short-term bonds (if investing in bonds at all).
  2. The municipal market would experience significant trouble in 2011.
  3. ....
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