Bonds and Fixed Income

[NJHowie]

Right - so general obligation bonds are usually best, because the municipality is pledging full faith and credit, meaning they will pay the bonds by whatever means necessary which they have at their disposal - pulling from any accounts they have, and including raising fees, general/sales taxes and property taxes. So, aside from the risk of bankruptcy, the general obligation bonds are going to be paid. Although nobody can predict the future, it is rare that bankruptcy will come in to play. And, in general you can get a good feel for the financial strength simply by reviewing the financial statements - income, balance, cash flow which they are required to have audited and report annually, and made available through emma.msrb.org. Weak municipalities are going to have a weak balance sheet and weak cash flow.

Revenue bonds can be higher quality or lower quality depending on what the security is backing them. Available in the offering statement, again, loaded at emma.msrb.org. If you've never reviewed an offering statement, just look up any municipal bond currently offered at your brokerage, jump over to emma.msrb.org, plug in the CUSIP, download and review the offering statement. In general, they all follow the same format. Which is nice, because after you've reviewed a few, you immediately know where to go in the document for the important information when doing your research.

As far as 6%-7% taxable munis - do you have an account with Fidelity? If so, copy/paste this in to your address bar and it will run a query I do daily:
https://tinyurl.com/2wpmbp5r

It uses min yield=5.7%. If you don't put some kind of bound on it, it will return over 3000 bonds, which is Fidelity's display limit.

Obviously the highest yielding are going to be lower quality. As I mentioned in prior comment, if you stick to A-rated or better, as shown in the Moody's report, the chances of default is well below 1%. So, in the list scroll down until you begin to start seeing A's. I have no problem taking BBB+, sometimes a BBB, and once or twice even a BBB-. To me, at the lower ratings, it boils down to if I believe Moody's/S&P are rating them correctly. Since I'm reviewing the financial documents, I'm gathering my own readings. If something is BBB-, but there is a backstop in case they run in to trouble, that is a benefit which the rating agencies may not be giving enough weight to. Or, maybe the finances have strengthened but they just haven't re-rated in a while?

Anyhow, water/sewer/electric revenue bonds are generally very strong - right up there close behind the GO bonds. They have very strong cashflow, as folks/businesses need/want their utilities. Additionally, if you read through a few of the offering statements, you'll see additional "covenants" that they are usually agreeing to - like their debt coverage will remain at/above some minimum, maybe something in the 1.1x to 1.25x range. They generally also stipulate that they will charge rates sufficient to maintain those debt coverage ratios. Most school district bonds are GO, so in general, they are also very safe. Those that are insured come with that extra level of safety, but at the same time should alert you that the issuer may be so strong - requiring them to get the insurance to allow them to issue the bonds at the original rate.

Chicago bonds are problematic. It's a very public issue how bad their finances are. Find the CUSIP for a Chicago bond, again go to emma.msrb.org and pull up the latest audited financial statements. You can see how terrible the balance sheet looks.

Now, the majority of folks will avoid Chicago bonds. But, there are always exceptions. Many smaller municipalities around Chicago get lumped together with it, some simply because they are in Illinois, but have strong financials. So, you'll see very weak pricing in the secondary market for the bonds - and this creates opportunity. However, it does take time to do the research, so if you don't want to get your hands dirty, it is easier to avoid it, and again, stick to A-rated or better.

I can go on and on if you like - just keep asking, I'm more than happy to share.