Finally, yields on municipal bonds have meaning. Considering all the interest rate hikes, it took time for munis to catch fire. The heat feels good.
Just as the Treasury market has an inverted yield curve, so do munis. Municipal bond yields as a percentage of similarly maturing Treasurys are rich. Currently, there are no bargains to be had. But wait until September when the new issue market takes off.
Few Muni Defaults
Muni default rates continue to be much lower than corporate bonds. Yes, we have seen some municipal bond defaults at a few small private colleges along with some small and medium size hospitals, crushed by post-Covid-19 overhead costs. Add to the short default list some sports-related centers. Nevertheless, the municipal bond market is solid with an overall low default rate.
Getting Paid For The Risk
Understand exactly what you’re buying in a municipal bond. The major question when investing is if the yield on the municipal bond is correct. For example, a state-issued General Obligation bond should yield less than a Tax Allocation bond. So too, should a school district revenue bond or a hospital bond. Issuer credit worthiness drives the bond yield. The tax allocation, school district, and hospital bonds are less credit worthy and deemed riskier than a state general obligation bond. Their price is lower and yields are higher.
States cannot file for bankruptcy as a matter of law. Further, state-issued general obligation bonds can endlessly tax their citizens—as does New York and California. This makes them inherently less risky than cities, college systems, school districts, sports venues, and hospitals, all of which can go bankrupt and do not have unlimited taxing authority, leaving bond holders with an empty bag.
Price Context
This simply means that the price you’re paying and yield you’re getting for a municipal bond should be in line with the last trade. If you’re being asked to pay a higher price than the last person, ask what’s changed and bid back. If the seller won’t budge, then pass and find another bond.
Price discrepancies often come in the small, odd lot munis –the 10’s, 15’s, and 20’s. For these, context is important. Often brokers will have less than desirable bids when an investor is selling an odd lot, making context an important part of the purchase decision.
Best States For Munis
I look for state issuers that are consistently fiscally responsible year after year. I like Florida, Georgia, Maryland, Minnesota, North Carolina, Tennessee, Texas, Utah and Virginia.
I feel your pain if you live in a high-tax state like California (as I do) or New York. Buying out of your state of residence can be costly.
Risk Of Over Concentration
You don’t have to load up your bond portfolio with your state’s general obligation bonds to manage your risk. You can substitute some essential service bonds like insured water and sewer bonds.
Use these suggestions for your rock solid money—money that absolutely, positively must be preserved.
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