|Managing Municipal Market Credit Risk|
|Written by Jared Kizer|
|Monday, 19 September 2011 00:00|
Overview: Our process for managing credit risk in individual municipal bonds goes well beyond the credit ratings that they are assigned by credit rating agencies. While we believe these ratings have value, and they are one piece of information we consider, we also evaluate other parameters such as the bond issuer’s municipal market sector, municipality revenues and financials.
Since the recession that began in December 2007, many investors have become more and more concerned about default risk in the municipal market. While that market has generally held up very well, and many in the financial media have exaggerated default risk, we want to outline the process we use to manage credit risk in municipal bond portfolios because it is an important part of our fixed income offering.
There are five key elements to our process: assessing the underlying rating of the issuer assigned by Moody’s and Standard and Poor’s, determining the bond issuer’s sector, reviewing the annual revenues of the issuer, analyzing information obtained through Bloomberg on issuer financials and current news, and assessing the credit risk the market assigns to the bond. Let’s briefly describe each step we take:
A municipal bond is eligible for purchase once it has met these five criteria. While this process does not ensure that we will avoid all defaults, we believe it greatly reduces the likelihood of a bond default. In practice, we have never had a default on a municipal bond that we have purchased, which speaks to the value that the above process has provided to our clients.
1 Moody’s Investor Service, U.S. Municipal Bond Defaults and Recoveries, 1970–2009. February 2010.
Copyright © 2011, Buckingham Family of Financial Services. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent the results of actual trading. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
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|Last Updated on Tuesday, 04 October 2011 10:42|