Why you should leave credit research to the professionals
Investing in municipal bonds: Your 3-step workout (Part 4 of 5)
3. Leave the heavy lifting to the pros. And by “heavy lifting,” I mean credit research. While overall creditworthiness is improving across the municipal landscape, and municipal bonds in general have had lower default rates than corporate bonds (LQD), no two issuers, credits, you name it, are exactly alike. You need to understand issuers’ ability to pay back debt, but also their willingness. This isn’t easily assessed, and there’s the potential for new precedents to arise out of cases such as Detroit. Professional eyes are priceless here, as a wrong move (particularly if you’re buying individual bonds) can make or break a muni portfolio. Our credit research team offers insight in their quarterly Municipal Credit Highlights.
Market Realist – The graph above shows the average default rates of public debt for 1999–2013, as given by Fitch ratings. The default rates are higher for speculative-grade (JNK) or high yield–grade (HYG) muni-bonds than investment-grade bonds.
The bankruptcy in Detroit caused the number of defaults in 2013 to notch up to 3 versus 2 the previous year.
You should be cautious not only of the maturity of the instrument but also of the states that issue those instruments and the sector they cater to.
BlackRock, in their third-quarter Muni Credit Highlights, favored municipal revenue bonds in the utilities (XLU), education, and hospitals (XLV) sectors. The caveats are that you should only invest with utilities providers that have relative autonomy in setting rates, education providers enjoying strong demand, and hospital providers that are national or regional and not standalone.
Read on to find out key investor takeaways in the current muni-bond setup.
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