Safe Municipal Bond Portfolio Management
What can investors do to maintain a secure municipal bond portfolio in the wake of bond issuing agencies facing such high debt? While the risk of muni bonds defaulting is still relatively low, particularly when compared to corporate bonds, and bond holders are still held as high priority to be paid from tax receipts, investors need to take a more proactive approach and be their own bond manager. This involves conducting one’s own thorough bond analysis, choosing short-term bond types that are less likely to default, and maintaining a diverse portfolio.
Is the Bond Market
Set to Face Systemic Collapse?
As there are 89,000 municipalities and an estimated 30,000 unique bond issuers in existence, one can imagine there is little prevailing homogeneity in the market, making massive, widespread defaults unlikely. But again, while municipal bonds have not been traditionally viewed as risky, the issuing state agencies that back them are facing such high piling debt that investors should urge their bond manager to protect their municipal bond portfolio by playing it safe and being more selective.
G.O. vs.
Revenue Bonds
Many bond managers have long turned to general obligation (G.O.) bonds for safe investing, but with the American economy still struggling and with all of the debt incurred by state governments, many have once again revisited the question, “What’s safer, general obligation or revenue bonds?” The above factors have lead to a climate where there may be more volatility surrounding the “old reliable” G.O., and many a bond manager now suggests that essential service revenue bonds are less risky right now.
What’s Safe
to Include In Your Municipal Bond Portfolio
Water and sewer bonds are examples of revenue bonds that are considered to be among the safest investments -- with the only caveat being that one should ensure that the issuer is in a stable area without much fluctuation in property taxes.
A bond manager may also consider higher-education revenue bonds, though these leave open the possibility for some risk, as revenue-supplying student tuition may fall below what the issuer needs in order to service borrowers.
On the other hand, infrastructure revenue bonds are significantly more risky. In particular, one should be exceptionally wary of hospital bonds, which have made up a significant chunk of the few muni bonds that have defaulted.
In the end, while some doomsayers have predicted the worst for the municipal bond market, investors aren’t allowing the alarmists to stop them from investing in munies – they’re simply game-changing to incorporate sounder, safer strategies. In fact, in the month of March, 2010 may have seen record sales for muni bonds. One can still make ideal returns by wisely choosing a conservative bond manager to follow safe strategies to protect one’s municipal bond portfolio.