With headlines blazing “Arma¬geddon,” the normally sleepy municipal bond market is finding itself center stage in the current “name that crisis” championship.
In seeing the sovereign debt crisis spread across Europe last summer, many of the talking heads in the media have begun to pick on struggling states and municipalities as the potential next proverbial shoe to drop. But how likely is it that they would default on their debt obligations.
In my recent conversations with a portfolio manager, an interesting tidbit came forward which I found interesting with regard to municipal securities:
“It is important to focus on higher-quality issuers that provide services that are essential to their communities. This “recession-proof” revenue stream from projects that are critical to the state’s progress, such as hospitals, education, transportation, and utilities, is where investors need to concentrate in this environment. This means carefully-selected essential service revenue bonds should currently be the foundation of a municipal portfolio and likely provide the most stability. Government obligations (“GO”) bonds still face significant challenges with budget constraints and public employee benefits producing high price volatility and the potential for downgrades. Finding issuers with little to no underfunded pension obligations and strong reserves will be challenging, but this is where stability will lie in the GO space.”
The take-away here is that not all Munis are created equal and the pros who are good at managing these types of portfolios should still be able to separate the wheat from the chaff.
