The world of municipal bonds is a vast market with enormous diversity. And while it’s filled with some excellent opportunities, some people fail to take advantage of all it has to offer due to unfamiliarity with this arena or other factors. Here are some key principles for understanding the municipal bond market:
1. Generalization is meaningless. Those who are interested in buying a municipal bond should take a look at the credit, examine the official statement, or offering document to the bond issue. At the very least look at the sections of this ponderous document concerning what actually secures the bonds, and risk factors, if any. The market is particular and specific to a surprising degree.
2. Municipal bonds are long-term investments. The MSRB, the self-regulatory organization governing the municipal market, has said that municipal bonds don’t trade 30 days after they’re issued. The Government Accountability Office in a report published this month stated: “In 2010 about 99 percent of outstanding municipal securities did not trade on any given day.” What this means is that if you have to sell your bonds before maturity, you’d better be prepared to pay a penalty.
3. Beware Inexpert Testimony. The rise of the Internet means that anyone with a keyboard has the credibility of publication, unfiltered by editors or institutional memories. Don’t believe everything you read. This being said . . .
4. I Can’t Believe Nobody is Saying This. Meredith Whitney said this several times in her 2011 tour. The implication was that nobody has been writing about state and local finance. In fact, and as I take pains to demonstrate in the Encyclopedia entries and their lists of sources, there has been lots of very good, detailed reporting and commentary on the market.
5. Political Risk. It’s rare, but not unheard of. In 1995, Orange County shocked the market when it stated that it retained the right to repudiate certain debt. Last year, both Jefferson County, Alabama, and Harrisburg, Pennsylvania, sought refuge from their general obligation creditors. The risk that politicians will choose default, repudiation and bankruptcy is remote. But it does exist.
6. Examine the Source. I may be wrong, but it seems to me that almost every book dealing with the municipal market has been either written or managed by people who want to sell you stuff — i.e., bonds, or banking, analytical, or financial advisory services. It’s no surprise that these books are uncritical of the sins that have occurred in state and local finance, like yield-burning, bid-rigging, the proliferation of swaps and the hijacking of methods of sale. The Encyclopedia aims to address this imbalance.
Joe Mysak is the author of The Encyclopedia of Municipal Bonds and editor of the Bloomberg Municipal Bonds Brief. Mysak joined The Bond Buyer in 1981 as a copy editor and learned about municipal bonds from the ground up, eventually rising to editor and publisher of the newspaper. In 1994, he founded a series of municipal market–related biweekly newsletters for the Interest Rate Publishing Corporation. In 1999, Mysak joined Bloomberg News as a columnist. He is also the author of the book Handbook for Muni-Bond Issuers.