Any financial magazine or TV show you look at these days, there are headlines everywhere that bring up how deeply in debt states and cities are everywhere and how risky this is for the municipal bond market. Add to this the fact that the federal government is neck-deep in financial trouble of its own, and there is plenty of fodder to fuel the obsessions of the bears who believe that muni bonds have nowhere to head but down. Industry observers, really respected ones, are beginning to sound the alarm that in the market for muni bonds that is worth $3 trillion, there are all kinds of issuers who are going to default any time. The news is sending bond owners into a panic.
Is all the panic really justified? Are muni bonds on the brink of disaster? Perhaps not. It appears upon closer inspection that muni bonds are as safe a way to invest your money tax protected as they ever were. They may be a slower way in which to make your fortune; but they are dependable as nothing else. If there’s anything we’ve learned from the financial meltdown from three years ago, it is that there is nothing, but absolutely nothing, that you can completely rely on as dependable. Even the best funds had their reputations swallowed up by the debacle. Is there something here that we need to know about as far as muni bonds are concerned?
Why exactly do we believe that muni bonds are ironclad? It’s because they get investment grade ratings. Any state that has its rating slashed to something below investment grade, that certainly can be a warning. Well-informed muni bond investors always keep in mind that just as with real estate, there is no one rule for the whole market. If muni bonds take a dive in one area, there will always be opportunities that come up in other areas or regions. Have Muni bonds ever actually been defaulted on? Have municipalities or states actually refused to repay their obligations? These kinds of things have happened from time to time; but since the government stands behind its bond issues, ultimately, bondholders are made whole again from one source or another. That’s what happened when Harrisburg, Pennsylvania, was unable to pay its bondholders in 2010. The state though came in and made good on the city’s word. This is what you need about the different kinds of Muni bonds there are and how to pick the safest ones.
General obligation bonds are the safest ones. They have the government’s complete backing. The government promises to pay you back no matter what happens. They can raise taxes to do it, for instance. Assessment bonds are backed by taxes as well – property taxes, specifically. And these are very safe too. When it comes to revenue bonds though, there certainly is a certain amount of risk at play. Revenue bonds for the government count on certain streams of revenue coming in the future to pay you back. If the government issues bonds to build a bridge and hopes to pay it back out of the tolls it collects, it can be in trouble if the building of the bridge takes longer than it expects or if there isn’t enough traffic to make the kind of income planned for. You’ll need to do a certain amount of research to make sure that the specific government body behind the issue of those bonds makes promises that it can keep.