Every raptor needs a bond allocation, especially in taxable accounts.  The problem at the moment is Bernanke and Yellen (mini-Bernie) have given us years of ZIRP leading to abysmal yields.  This also gives us interest rate risk after we buy bonds because up is the only direction the prevailing interest rate can go.  The entire point of having bonds over equity is to play defense.  Raptors do this by choosing a well diversified of fund of bonds with high likelihood of repayment and a short duration to protect against capital losses when rates rise.

First off, about the risk of nonpayment, we want a class of bonds that historically has a very low default rate.  Municipal bonds fit this mold with a historical default rate well under 1%.  There are corporate bonds with very high credit ratings out there for sure, but they paid under 2%.  Not enough meat on those bones to satisfy a raptor appetite.

There are a lot of municipal bond funds out there where you can buy a basket with one click.  Don’t choose the one with the highest current yield!  To get extra yield over the prevailing market rate in this market, you have to lend over a longer term.  We want a short duration basket that will decline little in the face of rising interest rates as well as roll over into a higher yield quickly as rates rise.

The Lizard King’s favorite municipal bond fund that meets these criteria?  The place he puts his own capital?  That would be: Nuveen Municipal Opportunity Fund, Inc. (NIO).  As of this writing it trades for 14.77 a share and has a tasty current yield of 5.9%.  Most raptors will be in the 25% tax bracket, especially post-retirement so that is equivalent to an after tax yield of 7.375%.  You need only about 14 times your annual withdrawal rate to retire without touching capital for expenses at that rate.  Not bad considering most pundits recommend a Safe Withdrawal Rate of only 4% (25 times your annual spending needs before you even consider taxes!)  Because interest rates are bound to rise, a raptor can expect to buy and hold NIO for decades and only do better as time progresses.

An important note: NIO is a “Closed End Fund.”  It has a fixed number of shares outstanding and cannot create or divest of shares based on market demand so it will often trade at either a premium or discount to Net Asset Value (NAV), depending on how irrational Mr. Market is feeling today.  Never buy a Closed End Fund when it is trading for a premium to its NAV!  That is a dumbo T.Rex move.  All Closed End Funds publish their current NAV.  NIO reports today’s NAV is 16.11 per share.  That means we can buy the underlying assets in the fund for about 8.4% less than they are worth at liquidation.

ACTION TO TAKE: Buy Nuveen Municipal Opportunity Fund, Inc. (NIO) up to NAV of 16.11

Devour your prey, raptors!

Raptoresque bonds (NIO)

Never miss another opportunity to devour prey!

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3 thoughts on “Raptoresque bonds (NIO)

  • February 25, 2015 at 9:45 pm
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    Is it still a good buy for someone in highest tax bracket today ?

    Reply
    • February 26, 2015 at 12:22 am
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      Vish, I consider NIO an excellent buy at today’s price. I hope to add more as funds allow. The deal is even better if you are in the top tax bracket. Note that in the top tax bracket, there might be a small amount of Alternative Minimum Tax on NIO. It should be trivial though.

      Reply
  • Pingback:Hold NIO Buy Nuveen AMT-Free Municipal Incom (NEA)

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