As interest rates continue to dwindle and the chase for yield intensifies, folks are taking more risk to secure some return. It is beginning to be unjustified and muni investors need to understand when it is not prudent to be purchasing. It is time to be extremely picky when purchasing individual municipal bonds. It does not make sense to be purchasing 3% and 4% (taxable) munis when you have to go out 20 years or more. In the tax free space, yields across the spectrum, with any modicum of quality are well below 2%, many times even below 1%. It makes little sense in owning these, when you can get better returns with CDs, even forfeiting the tax benefits of the tax free muni.
Before purchasing any individual municipal bond at this time, the investor should take the time to review and understand the official statement (equivalent of a stock offering prospectus), and the continuing disclosures (historical audited financials and reports).
Those who simply opt to accept S&P and Moody's ratings on the bonds to satisfy their need for safety may find themselves disappointed as the ratings can, and likely will trend lower as economic conditions weaken, municipal obligations increase, and budgets are busted.
If you are purchasing revenue bonds, you need to be darn sure that the revenue source does not have the potential of drying up over their remaining term. Generally, those bonds are unsecured - they are not backed by any asset, and are solely payable from the revenue source. When you review the official statement, you'll generally find big bold print indicating this.
This is super helpful. Very much appreciate it. I am going to do some homework on individual bonds. I have both Vanguard and Fidelity so I am set there.
Spend the time to become very familiar with emma.msrb.org. Take the CUSIP of any municipal bond and look it up there. Then review the official statement, and a few of the annual audited financial reports and economic reports provided by the municipality. Learn how to identify potential issues that could be risks down the road. Look up the information for a mid/high A-rated issue and then do the same for a mid/high B-rated issue and study it until you are comfortable that you can identify why one is rated differently from the other.
While interest rates are so low, and possibly go lower, the risk/reward argument in favor of municipal bonds is not so persuasive. The fact that the sector is coming up more in articles and discussions is more an indication that the best of times has passed. A year ago when all the talking heads were saying how stupid it would be to own bonds while rates were rising - that was the time to be purchasing. Today, with those same folks now convinced that rates are headed to zero and possibly negative - it's become too crowded in the muni space. If anything, it's time to be pruning holdings which have appreciated significantly, as yield to maturity is currently quite low and probably not worth taking the risks for holding for many issues.
I maybe need to find a muni bond alert program better than the one I’m using at Fidelity. I’m not finding much in the way of GO issues at all. Hospital, education, toll road, airport, water, etc revenue bonds are more attractive to me. Also gotta watch for taxable muni bonds esp for stadium construction.
Go to emma.msrb.org, create a free account there, and then you can create savable queries. They provide significantly more parameters to query on than Fidelity and the other brokerages. However, there is not an alert mechanism - you need to manually run the query from their site. The other issue doing that is that it locates municipal bond issues for you, it's not going to tell you if Fidelity (for instance) currently has it in its inventory or a dealer is offering it. You may be able to increase the odds of this, you can include additional parameters around what's been trading recently, and possibly what's had events/filings recently. Generally, I will scan what Fidelity is offering, then go to msrb.org to further investigate anything which I find interesting, and then decide if I'm still interested.
If you are looking at a municipal bond on Fidelity's site, and you go to the bond details screen, on the right hand side on the top, under "Official Municipal Documents" is a link to "Offering Statement (PDF)" - this will take you directly to the bond page at emma.msrb.org.
