Municipal Bonds: Safe Bids on Water Bond Values

The municipal bonds market continues to perform well with muni bonds being issued as though it’s business as usual, but the shaky market and rising risk of defaults cannot be ignored. Most investors see munis as a safe haven bid that brings higher yields and bond values than treasury bonds. The default rates are low, and the income realized is tax free; however, the notion of muni bonds being an invulnerable investment is being tarnished by the national deficit plague and looming state pension shortfalls, which will only be compounded by the fact that most bonds are going uninsured in modern times.

Are Muni Bond Values Worth the Risk?

Indeed, you’ll likely have a hard time insuring municipal bonds these days, because most insurers had to shut their doors during the credit crisis. The scary reality is that only a miniscule amount of bonds were insured last year, and that number has only improved marginally in 2010.

Furthermore, bond values are sure to go down as interest rates are rising, and state tax revenues are hurting. One must wonder if municipalities are simply ignoring the crisis by issuing copious munis. It’s no wonder investors fled to treasury bond values last week.

Playing It Safe with Municipal Bonds

If conditions continue to worsen, counties may no longer be able to raise taxes to pay for municipal bond obligations; however, the safest of munis still carry minimal risk and enticing bonds values, which still has investors gravitating to munis. Yields for municipal bonds are currently at 6% and BABs still remain wildly popular. The bottom line: If you invest time into smart bond analysis and research, strong returns can be realized.

Although general obligation municipal bonds have historically been a safe bet in areas with a lot of financial debt, essential service revenue bids are often seen as a better option. Backed by electricity and water, these municipal bonds will virtually always make for solid, safe investments, because virtually everyone ensures that their water bills are paid and cash flow is not an issue here. These revenue bonds are especially safe when rated AA or better and situated in more developed areas.

Right now, it’s important to choose quality over junk, and as corporations are starting to pick up with the economy, you may want to turn to corporate bonds as well. While the future is still somewhat uncertain, the municipal bonds market currently offers strong returns on bond values.