Muni Bond Market Safer Than You Think
Pay close attention to the quality of the municipal bonds and municipal bond funds that you own or are considering buying.
That's the best advice for investors in this panicky 2011 in which fleeing the muni bond market is a national obsession. Calm down and remember that all municipal bonds are not alike.
"The municipal bonds most likely to default either aren't credit rated or have low credit ratings and provide non-essential services tied to a specific asset or project, such as a golf course," said Andy Kapyrin, director of research for
Soon billions of dollars were being yanked out of muni funds and individual bonds also sold off. That put greater downward pressure on muni bond prices and added to the woes of the investors still holding them.
"We'll likely see continued weakening in the muni market because of negative headlines, but if a professional manager helps you to select them, or you go through a mutual fund, the likelihood of default is extremely small," said
Acknowledging such market volatility,
To fight back, states are marketing their state-issued munis with aggressive campaigns to emphasize their safety for average investors in the hope that average folks will "do the right thing." Individuals are not only receiving higher yields on these issues, but they are being given priority over institutional investors in buying them.
Since most municipal bond investors are conservative folks seeking tax-exempt opportunities in a market they expect to be saner than the stock market, all the excitement is a shock to the system. Many investors have kept virtually all of their savings in munis for years, and the daily reports of drastic government belt-tightening have added to the wall of worry.
Yet the municipal bond market has more than 40,000 issuers and offers plenty of choices. One way to build confidence is to stick with quality issues rated AA or higher. Keep in mind that long-term munis, like all long-term bonds, are the most vulnerable to interest-rate risk. In muni mutual funds, seek the lowest-fee funds because their managers won't find it necessary to swing for the fences to capture better yield.
"A lot of fuss about bond defaults is overblown because most of the big stories that made the news were projects that municipal bond researchers deemed uneconomical from the get-go," said
Here are two conservative
Average credit quality of its bonds is A and average duration 5.10 years. The fund's minimum initial investment is a little steep at
Average credit quality of its bonds is AA, and their average duration is 5.59 years. The fund requires a
"Our view of the muni bond market is that credit risk is very low, and, historically, muni bonds have had very low default rates," said Kapyrin. "It is possible they will have higher default rates going forward, but, if you think about the munis that have defaulted in the past, you can usually typecast them as those having no ratings at all."
In addition, munis tied to a specific asset, such as a turnpike, may not collect enough tolls to pay its bondholders, he said. But a general obligation bond issued by a state such as
"Because the state or city can raise taxes or cut spending, it's pretty difficult to default on general obligation bonds," Kapyrin concluded.
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