PRHTA bonds (745190TD0, 745190TR9 and a few others)

[muscleman]

Now the pricing anomaly mentioned on this thread is interesting.  Seems like there's a solid arbitrage opportunity there for someone to buy the lower rated and short the higher rated.  Of course if this thing is going to zero, and it's Caa1 maybe the cap structure doesn't matter much.

 

I think you made a typo here. The senior bond is 38 and subordinated is 44, so if you could somehow buy senior at 38 and short subordinated at 44, you will lock in a profit even if both go to zero.

But with the low liquidity, I am not sure if you can do this arbitrage.

[oddballstocks]

Now the pricing anomaly mentioned on this thread is interesting.  Seems like there's a solid arbitrage opportunity there for someone to buy the lower rated and short the higher rated.  Of course if this thing is going to zero, and it's Caa1 maybe the cap structure doesn't matter much.

 

I think you made a typo here. The senior bond is 38 and subordinated is 44, so if you could somehow buy senior at 38 and short subordinated at 44, you will lock in a profit even if both go to zero.

But with the low liquidity, I am not sure if you can do this arbitrage.

 

Yes, you're right about the shorting.  I'm not seeing the illiquidity though, there are a decent amount of these trading daily.  Looks like you can get up to a few hundred bonds a day if not more.

[Picasso]

I'm just browsing the trade history on a few of these and they are really all over the place.  On 745190ZT Muni prices have been between 42 and 59, that's quite a range, especially in the course of a week.

 

How do you get good pricing on these things as an individual?

 

Looks like there's a lot more sellers compared to buyers, on most days significantly so.  I'm guessing this is the reason for the pricing?

 

Good question about pricing.  Probably my favorite part of municipal bond investing with distressed issuers.

 

It goes something like this:

 

Customer: Hey can you sell my bond?  I read bad things in Barrons.

Broker 1: Sure, we got a bid back at 70.  This thing can go to 10 bucks so you should take it.

Customer: Okay

 

Meanwhile across another muni trading desk....

 

Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday.  If anyone is offering thse bonds, pull down your bids to the low 70's.  We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm).

 

The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling.

 

This is where you get good pricing.  You follow bonds you know are being sold in a poor fashion and try to take advantage of it.  Unfortunately you can't do this through IB or Schwab.  You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase.

 

To get good pricing on the sale is a different story.  I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93.  You have to be careful when selling any muni bond if you have never done it before.

 

 

Which broker do you use?

I use IB and all I can do is to just put in a limit order and wait. IB will manually execute the trade for me.

 

I make a market myself.  I also use several regional and large brokerage firms to track non-listed inventory.  The inventory you'll see at firms will generally be marked up 4-6 points above market so you need to be careful.  People somehow think that paying 0.1/bond to buy a bond which is marked up 5 dollars is a good deal.  You're better off buying a bond under market but paying half a point to have someone else execute it.

 

Bloomberg has some pretty cool municipal screening functions so you can track when certain bonds trade away from the market.  I watch this and try to track down who owns it.  Maybe next time I execute a purchase far away from the market I'll post it so you guys can check out the inefficiency.

[muscleman]

I make a market myself.  I also use several regional and large brokerage firms to track non-listed inventory.  The inventory you'll see at firms will generally be marked up 4-6 points above market so you need to be careful.  People somehow think that paying 0.1/bond to buy a bond which is marked up 5 dollars is a good deal.  You're better off buying a bond under market but paying half a point to have someone else execute it.

 

Bloomberg has some pretty cool municipal screening functions so you can track when certain bonds trade away from the market.  I watch this and try to track down who owns it.  Maybe next time I execute a purchase far away from the market I'll post it so you guys can check out the inefficiency.

 

wow! How did you make a market yourself without using a broker?  :o

 

 

[muscleman]

Good question about pricing.  Probably my favorite part of municipal bond investing with distressed issuers.

 

It goes something like this:

 

Customer: Hey can you sell my bond?  I read bad things in Barrons.

Broker 1: Sure, we got a bid back at 70.  This thing can go to 10 bucks so you should take it.

Customer: Okay

 

Meanwhile across another muni trading desk....

 

Trader: Holy crap these bonds just traded at 70 after being sold at 85 yesterday.  If anyone is offering thse bonds, pull down your bids to the low 70's.  We're also going to stop letting customer buy the bonds now that they're trading at 70 so that should help the situation (sarcasm).

 

The next day the index drops 5%, customers who havn't sold see the drop in the index and start panic selling.

 

This is where you get good pricing.  You follow bonds you know are being sold in a poor fashion and try to take advantage of it.  Unfortunately you can't do this through IB or Schwab.  You need accounts at firms where these bonds are being sold or you need a trader to contact these firms for purchase.

 

To get good pricing on the sale is a different story.  I've purchased bad bids at 82, waited 15 minutes and sold it to another desk at 93.  You have to be careful when selling any muni bond if you have never done it before.

 

I am a bit confused about this part. Why would stop letting customers buy help the situation? Are you saying this would help the brokers buy at 70 so they can later sell to customers at 85?

Recently I made a call to Fidelity bond desk and they said they did not allow customers to buy the PRHTA bonds "because they are too speculative". I suspect if this is what aligns with your story here. ;D

[Picasso]

Not letting customers buy obviously makes the situation worse.  They were perfectly fine letting people buy when the price was much higher but all of a sudden when the price drops it becomes more speculative.  That said, funding concerns similar to a bank run can develop in these types of bonds and it is much easier to sue brokerages over something like Puerto Rico.  Risk management from a reputation and legal perspective.

 

The way I make a market is complicated but it involves directly buying from individual sellers with the help of a trading desk to determine the price.

 

 

[muscleman]

Not letting customers buy obviously makes the situation worse.  They were perfectly fine letting people buy when the price was much higher but all of a sudden when the price drops it becomes more speculative.  That said, funding concerns similar to a bank run can develop in these types of bonds and it is much easier to sue brokerages over something like Puerto Rico.  Risk management from a reputation and legal perspective.

 

The way I make a market is complicated but it involves directly buying from individual sellers with the help of a trading desk to determine the price.

 

Oh, got you! Yeah. That is the typical way Fidelity does business. What other brokers do this? I assume most brokers restrict clients when the price drops?  :)

[Picasso]

Not letting customers buy obviously makes the situation worse.  They were perfectly fine letting people buy when the price was much higher but all of a sudden when the price drops it becomes more speculative.  That said, funding concerns similar to a bank run can develop in these types of bonds and it is much easier to sue brokerages over something like Puerto Rico.  Risk management from a reputation and legal perspective.

 

The way I make a market is complicated but it involves directly buying from individual sellers with the help of a trading desk to determine the price.

 

Oh, got you! Yeah. That is the typical way Fidelity does business. What other brokers do this? I assume most brokers restrict clients when the price drops?  :)

 

Almost all of them do this.  The corporate market is a bit different but in muni land, retail investors are trading like we are back in 1924.

[muscleman]

http://www.municipalbonds.com/bonds/issue/745190MH8

http://www.municipalbonds.com/bonds/issue/745190TD0

 

The 2018 subordinated now trades at 60 while the senior debt trades at 44. Can you believe it? ;D

 

[muscleman]

http://blogs.barrons.com/incomeinvesting/2014/08/14/puerto-rico-prepa-utility-announces-creditor-agreement-extension/

 

Debt holders deferred the payments so the game can continue.  :)

I think this looks more like a muddle through scenario now.

[muscleman]

Not letting customers buy obviously makes the situation worse.  They were perfectly fine letting people buy when the price was much higher but all of a sudden when the price drops it becomes more speculative.  That said, funding concerns similar to a bank run can develop in these types of bonds and it is much easier to sue brokerages over something like Puerto Rico.  Risk management from a reputation and legal perspective.

 

The way I make a market is complicated but it involves directly buying from individual sellers with the help of a trading desk to determine the price.

 

Picasso, I notice that the dealers are taking these bonds at higher and higher prices without an investor buying on the other side of the trade. Why are dealers accumulating inventory and willing to pay more and more to accumulate? Do they speculate on the prices as well? I thought they would just find a buyer and a seller and buy low from the seller and immediately flip to the buyer for a small profit.

http://www.municipalbonds.com/bonds/issue/74526QKQ4