When buying municipal bonds, what minimum ratings do most of you look for? AAA is the highest investment grade, but of course, the lowest yield. The books on bonds I've looked at set BBB as the lowest investment grade bond level. BB and below being speculative, highly speculative, and worse.By setting my brokerage site's muni search engine to shoot for BBB and better, I've found one bond that yields more than 9% (coupon was 5%) and is rated Ba3/A. How much more risk would I be taking by going for something like this? Assuming the ratings are valid, it seems like a reasonable risk to take for the higher yield. The fact that we are dealing with state governments with munis makes me think payments would be reasonably secure. Am I missing something?
Some muni bonds are subject to AMT. Some are even taxable in the regular manner. If one bond gives a much higher yield than others of the same rating and maturity, check that detail. If you are starting to buy muni bonds, review your taxes and see whether you are subject to AMT, or whether additional tax-advantaged income might either put you in the AMT bracket or restrict your ability to collect tax credits. Make the decision whether you are or are not interested in a bond subject to AMT. Best wishes, Chris
Folgore,Munis are a different gig. Some are insured, some are rated directly. Also, it does matter when they were last rated. The question always is, do you think they can make good on their debt? That is the burning risk question. How deep in debt is this government entity? What is the political reality for tax and spending issues? Can they raise taxes if needed? Do they control spending? Can they realistically cut much? How narrow is the difference between party control? Could they quickly flip from one party to another? Would it make a significant difference?jack
In addition to Jack's good points...Is the muni bond a GO (General Obligation) bond, paid out of taxes? Or is it a specific project bond (e.g. bridge, sports arena) that is paid from the expected cash flow of the project?Wendy
"I've found one bond that yields more than 9% (coupon was 5%) and is rated Ba3/A."I would be very wary of a bond that pays unusually high yield for its bond rating. It is a flashing yellow light that must be explained before I would invest.Some possible reasons-->The bond is about to be called and the call price is holding down its market value giving it a higher yield than normal. (If you pay over the call price, it can be called out from under you at a loss.)>Some news event has occurred that makes people think the bond is about to be downgraded. (Remember that bond ratings for iffy investments were very much a part of the subprime melt down. Bond ratings work best for ordinary good quality, very boring bonds that just keep paying their interest. Anything fancy and ratings may not be reliable.)>Some bonds are insured to get them higher bond ratings, but the insurance has recently been shown to be based on those derivatives that caused AIG so much trouble. The insurance could be worthless. Is the bond rating still good? The insurer still solvent?
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