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Wednesday, December 24, 2008

Pre-Refunded CA GO Bonds

Last weekend a caller asked Bob Brinker if he still felt California General Obligation Bonds he recommended in the past were good, safe investments or if she (the caller) should sell them.

Brinker's reply was
"That's a personal decision, Pamela. I really can't tell you what to do with your bonds. I have some California bonds, but in almost all cases my bonds might be different than your bonds and I'll tell you why. The bonds that I own have Treasuries behind them. In other words, they've been pre-refunded by earlier transactions by the state and backed by Treasuries. So in almost all cases, the California bonds that I own are actually backed by Treasuries and are not backed by the State of California....."
Honeybee gives a full report of the call at Summary: Bob Brinker's Moneytalk December 20, 2008

I looked up what "pre-refunded" means. It simply means Brinker's bonds will be "called" so he will soon get his money back. It is similar to refinancing your home mortgage where the borrower will get a better rate and you have to invest your cash now at very unattractive interest rates. For example, Vanguard's Prime Money Market Fund is only paying about 2.43% these days.

It may also mean he sold his CA GO bonds and bought some of these "prerefunded CA GO Bonds" in the secondary market for their safety but lower interest rate. If he did that, then he should have told the lady caller he sold his CA GO bonds to get safer ones.

If they were called away, then Brinker won't get the interest rate he thought he would get for the full term when he bought the bonds. Brinker will get his money back early and will have to reinvest the money, perhaps at much lower rates than had he bought a CD. Brinker 's audience probably could have done much, much better locking money into CDs (CD Rate Survey) which are not callable so they get the good rates for the full term.

From BondDesk.com Glossary:
Callable Bond: A condition of a bond permitting the issuer to redeem it before maturity on specified dates at specified prices.

Pre-Refund: Bonds that will be called on the stated call (pre-refunded) date. The monies used to call the bonds are on deposit in an irrevocable escrow account from the proceeds of a more recent bond issue from the same issuer. Bonds are pre-refunded in order to take advantage of the lower interest rates, thus lowering the issuer's interest expense.

Call Risk: For a REMIC, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor's principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.
I don't know why Brinker did not say his bonds have been called and he will get his money back early or he sold his CA GO bonds to buy this safer investment. Maybe he didn't want to admit his advice to buy them turned out to be poor compared to buying CDs of the same term. It would be a good lesson on why buying bonds has risks not often mentioned.

The very low treasury rates for short term monies could be from demand from states like CA buying short term treasuries to "pre-refund" the debt they refinance at lower rates.
I also don't know why he refused to answer the caller and give a recommendation for the bonds she owned if they were not called.

With rates so low, banks will try to sell you their annuity products. Make sure you read my article:
Beware of Annuities
"Highest CD Rate Survey + Current US Treasury Rates"
Term
Date
Highest
Rate (APY)
Where?
(Click link for Full Rate Sheets)
Daily Savings
12/21/08 2.43%
Vanguard Prime Money Market Fund
Tax Exempt
12/21/08 1.03%
Vanguard Tax Exempt Money Market Fund
Online Savings 12/21/08 3.00%
High Performance Money Fund @ Wachovia Bank
3-Month Treasury
12/21/08 -0.01%
US Treasury Rates at a glance
6 Months 12/21/08 3.51%
Fultdirect.com & 3.50% @ Corus Bank
6-Month Treasury
12/21/080.14%
US Treasury Rates at a glance
7 Months 12/21/08 2.00%
Wachovia Bank
1 Year
12/21/08
3.90%
MetLife Bank
1 Year Treasury 12/21/08 0.37%
US Treasury Rates at a glance
18 Months 12/21/08 3.95%
MetLife Bank
2 Years
12/21/08
4.25% MetLife Bank
2 Year Treasury 12/21/08 0.74%
US Treasury Rates at a glance
3 Years 12/21/08 4.35% MetLife Bank
3-Yr Treasury
12/21/081.03%
US Treasury Rates at a glance
4 Years
12/21/08 4.51% Flagstar Bank & 4.35% @ MetLife Bank
5 Years
12/21/08 5.00% Washington Mutual - WaMu
5 Yr Treasury
12/21/081.36%
US Treasury Rates at a glance
7 Years 12/21/08 4.75% Pentagon Federal Credit Union
10 Yr Treasury
12/21/08 2.12%
US Treasury Rates at a glance
10 Years 12/21/08 4.15%
Intervest National Bank
30 Yr Treasury 12/21/08 2.55%
US Treasury Rates at a glance


Comment on This Article

Merry Christmas, Happy Hanukkah to all!!

3 comments:

  1. The above article about Brinker's refusal to answer the caller's question about past advice given on the radio is a perfect example of why I am a fan of "Brinker the Clown" (an entertainer much like Jim Cramer) but not "Brinker the Investment Advisor."

    Bob Brinker is fun to listen to for investment ideas or what the crowd wants to invest in, especially since I am a contrarian investor. BUT.... I don't trust Brinker for honest investment advice as his evasive reply to the caller Pamela shows. He has done the same thing with bad advice in his newsletter such as putting QQQQ and TEFQX on "hold for future recovery" when he drops all discussion of his advice to buy those securities.

    ReplyDelete
  2. everyone is a genious in a bull market , brinker had his day .
    thanks for the blog
    joe
    www.tradersaffiliates.com

    ReplyDelete
  3. A pre-refunded bond is one that is escrowed to THE FIRST call date (or sometimes a later date). They are usually escrowed with US Treasury securities. That means they are 99% as good as a US treasury. It could be years until the first call date. 5 to 7 years to the call date is not unusual.

    Bob could have bought pre-refunded bonds, or he could have bought regular bonds that were subsequently refunded and became pre-refunded bonds.

    ReplyDelete

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