My alternative investment of excess savings

[gzz]

I am a fan of the closed end fund BBN. These are taxable minis. I like reporting a higher AGI and then paying taxes on it, if I need a big mortgage some day this will make my tax returns look better than with tax free munis.

Since I have owned them I have lost about 3% in an unrealized capital loss and received about 18% interest pre-tax, 12% post tax.

Current yield is about 8% pre-tax.

[gzz]

More detail here:

http://www.morningstar.com/cefs/xnys/bbn/quote.html

[Coronita]

How long have you had them? I can see if you had them prior to 2012 they would be doing ok. But if you bought after 2012 (especially between 2012-2014, they would have done pretty bad. And aren’t you worried with a pending rise in interest rates?

I’ve been slowly pulling out of long term bonds. The only bond related funds I have left are Vanguard CA- tax except muni bonds (intermediate term). They aren’t doing that well. I’m averaging around 2.5% fed and state tax exempt, which is the same as my mortgage. The long term was doing about 3.5% fed and state tax exempt, but only because I’ve been in them for a long time (before the rise and fall of bonds).

I missed the boat on bonds. They have done well if you started out about 8 years ago.

I guess this goes back to the thread about finding an investment that beats the average rate of return of one’s mortgage.

I don’t know. I don’t think even if someone were able to buy into BBN right now, that they would be looking at the great returns it did have from the past decade. Thoughts?

[gzz]

My understanding is that with tax exempt minis, the very rich in the top brackets will bid them up to risk adjusted parity given their high bracket, so unless your taxable income is also extremely high, you are better off avoiding tax exempt munis.

I’ve been in BBN since 10/2013 and my average price is 0.3% less than the current price.

“I don’t know. I don’t think even if someone were able to buy into BBN right now, that they would be looking at the great returns it did have from the past decade. Thoughts?”

The scenario where BBN does really well is (1) no major wave of muni defaults not covered by bond insurance (2) rates drift down in the USA toward the savings glut/demographic decline levels in Western Europe and Japan.

I happen to think both of these will be the case.

For #1, in the depths of the recent recession muni defaults were still extremely low. Historically, they are much lower than corporate. There is a bias in the ratings agencies in how they rate the two groups. Munis rated “B” have a default rate 90% lower than corporates with the same rating.

(Puerto Rico is a unique situation and near default. BBN does not own any PR bonds at all.)

For #2, here’s bloomberg’s page showing major economy 10-year bond rates:

http://www.bloomberg.com/markets/rates-bonds

Rates may feel low right now in the USA, but we have a long way to drop.

[Jazzman]

I am no expert, but isn’t buying into any bond fund now expensive and more likely than not, regardless of what it is, to drop in value as rates go up. If you are buying any bonds, I would have thought that buying short maturity individual bonds at par, (or new issues) and laddering them to take advantage of rates as they rise is the only safe way. You just need to accept the very low yield. BBN only has an average return and risk rating and three stars from Morningstar.

[Author]

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