The most recent drama brought to us by the news media has been the risk of municipal bond issuers defaulting on their debt obligations. We and other professional investors in municipal bonds have been aware of and monitoring the heightened municipal bond default risk for nearly three years. However, it took a segment on 60 Minutes featuring the photogenic, publicity-minded banking analyst, and newly-minted municipal bond expert Meredith Whitney to really light up the airwaves on this issue. Whitney predicted: “Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”
Bottom line: The risk of municipal default is higher than the norm of the past 70 years. But, history and the factors just described show us that municipal bonds are far less risky than corporate bonds. That is the reason that the average credit rating of all municipal bonds is near AA, while the average rating for corporate debt is at least a letter grade lower. There are still municipalities out there that are very bad credit risks. And, Ms. Whitney rightly says there is more risk in municipal bonds today than there has been over the last 70 years.
Source: Rising Dividend Investing
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