Munis in Mind (Part 4)

There are lots of reasons why munis are safe.

Moody’s Investor Services just published a report on municipal credit. In it they noted that all the states are rated Aaa to A1, while only 4 percent of non-financial corporations are rated that highly.

Why does Moody’s consider the states better credits? First, states enjoy numerous financial advantages. They are essentially monopolies, able to raise the prices of their services at will. They can also cut spending without worrying about lower service levels hitting revenues in the short run, kind of like the local cable company.

Second, bondholders enjoy especially strong credit protections. Often debt service obligations are protected by state law. So recoveries tend to be quite high in the event of a default. And if you own a bond secured by specific revenues like water charges, you effectively have a secured claim on that asset. Even if the town defaults, these "subsidiaries" are still obligated.

Finally, states and towns provide truly essential services–education, police and fire, and the legal system. It’s not like citizens can decide to opt out.

These reasons all help explain why munis are likely to remain the most boring of bonds. And that should help us all sleep better.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T17:36:45+00:00 October 7th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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