A little more than a year after the first signs of mayhem in the municipal bond markets, issuers are still defaulting, and investors are still worried. And while investing professionals would say that in this climate, it’s best to leave your bond research to the experts, that’s not the only way: A little diligence, a free afternoon and an Internet connection is enough to start separating the risky munis from the stable ones.
The goal – to build a portfolio of municipal bonds that reduces risk and supplies steady tax-exempt income – is still possible, says financial advisor Dennis Gibb, president of Sweetwater Investments, an investment advisory firm in Redmond, Wash. By picking issuers whose finances and politics you can track thoroughly, like your local or state government, and investing in bonds backed by recession-proof, essential services, it’s possible to avoid potential blow-ups and ride out the current muni mess. It’s far from easy, says Matt Fabian, research director of Municipal Market Advisors, “but in some cases you can figure things out.”
Of course, doing due diligence on a bond issue isn’t the most entertaining way to spend a Saturday afternoon. Issuing documents are often hundreds of pages long, written in dense legalese. Bond issuers are slow to disclose bad news, and with about 1.5 million separate bonds out there, it’s a highly fragmented market, says Marilyn Cohen, head of Envision Capital, a Los Angeles fixed income investment firm. That’s why most people rely on their broker, or simply buy a muni bond fund. Still, not every broker is a muni expert and may not have access to bonds that meet your needs. Doing your own research is time consuming, says Gibb, but it gets easier with practice.
Before looking for new bonds, take an inventory of your current portfolio to see if your bonds and their issuers are as good as they were when you bought them. Many issues have lost the safeguard of municipal bond insurance, which backed high-quality ratings for about half of top-rated bonds before the 2008 crash, says George Rusnak, managing director at Wells Fargo Wealth Management. Now, he says, only about 7% of top-rated munis are insured – at a time when state and local governments are increasingly strapped for cash. “Quite frankly, we’re seeing a lot of people who don’t understand the credit problems they have” in their portfolios, Rusnak says. Be prepared to hang on to bonds that have lost value and simply cash out at maturity, he says.
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