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Determining the ‘quality’ of a municipal bond


In your recent article (Muni Investors Succeed by Defying the Odds), you say investors should look for “quality” municipal bonds first, then yield. How should I base my determination of quality? Ratings? If so, which one do you feel has a better pulse on the muni bond market?

R.M., Washington


James A. Klotz responds:

Ratings are a good start, but they should not be the sole criteria for determining the credit quality of a municipal bond.

As bond specialists, we drill down to determine exactly how the bond is secured and how the investor gets his money back. After all, a bond is a loan.

This process involves analyzing the official statement for any obscure but important details, as well as researching previous material disclosures. In some cases there can be political situations that involve lawsuits or potential legal challenges.

Although buying insured bonds allows you to invest with a greater degree of confidence, it is important to also examine the underlying credit as if there were no insurance.

Moody’s and Standard & Poor’s are considered the premier rating agencies for municipals.

Apr 28, 2017

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