Recent news stories regarding the municipal bond market and its impending fiscal crisis have been unnerving and intimidating to many investors. While this is a difficult time for municipalities, the alarming viewpoints in the media are often overblown.
The question we are frequently being asked is: “What should investors in the municipal bond market do?”
Decades of experience tell us the municipal bond market is not and cannot be immune from the financial crisis of the past several years. Historically speaking, traditional municipal bond investments have a long, proven and exceptional record of making principal and interest payments promptly. Moreover, default rates are rare among rated issues, despite the recent headline grabbing stories. However, it is the disclaimer “past performance is no guarantee of future results…” that serves to alert us that there are risks, and losses may occur when investing, including municipal bonds.
Looking forward, it is still possible to construct and manage a conservative, diversified municipal bond portfolio. Investors should ask the following critical questions, at a minimum, of their adviser as it relates to each municipal security they own:
- What is the purpose of the specific debt issuance?
- What is the source for repayment? For example, is it an essential service revenue stream, such as a water or sewer fees, or perhaps a first claim on property taxes?
- What is the legal security for the bond? Do you have the first claim on revenues? Is there a debt service reserve fund? And, what minimum debt service coverage is required?
A municipal bond portfolio with consideration of these attributes, (and more depending upon each investor’s unique goals), can achieve a reliable flow of income while also controlling for portfolio volatility and liquidity, even beyond that found in many other available investment options.
The municipal bond market has proven to be resilient in the past, as it has played an important role in the economic life of the United States for decades. The media attention will likely remain causing continued investor uncertainty. That said uncertainty, fear and turmoil may also create opportunities for the disciplined and informed investor.
