Municipal Bond Forum
Avoid generalizing bonds types
Q
I’m not sure if you’ve specifically addressed this already, but I am interested in knowing which muni-bond categories are the safest. A recent article in Smart Money suggests General Obligation bonds are the safest, but then goes on to say “bonds backed by water or sewer fees” (revenue bonds) “are usually safe.” I’d like to know which categories to avoid.
A
James A. Klotz responds:
As you guessed, we have addressed this question on a number of occasions, most recently in a Bond Forum item dated 2/18/10, GO vs. revenue bonds. At that time, we were responding to an inquiry regarding a specific Florida GO. You will see that we also defined general obligation and revenue bonds as general classifications.
It is important to understand that in every structural category, there are bonds we would recommend and those we would avoid. Every bond needs to be evaluated on its own merit.
As municipal bond specialists, we employ a full-time municipal credit analyst as part of the process in identifying the bonds we choose to recommend for our clients’ portfolios.
As with most things, the municipal bond selection process is impaired by attempting to apply categorical generalizations.
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