Are Muni Bonds Cheap Again?

Back in 2009 Munis got a lot of attention because several states were in trouble, meaning they couldn't service their debt loads. The situation is not much different now and still most muni issues are still being serviced.

So, what has changed?

For one, their credit ratings. Specifically, two California issues I own (one of which I discussed back in 2009) are now back in investment-grade camp. Both 13062TPU2 and 13062TSB1 started 2009 as A+ issues and were downgraded to BAA1 (or BBB as Fitch calls it). Both are now back to A-, as of late 2010. And yet, their prices have fallen recently, probably in anticipation of more ugliness ahead.

However, these two issues are still paying their coupons and both are fully backed by the state's taxing authority. No disclosures of other material events have been filed with the MSRB.

In this case, should a California-based investor buy more?

I can't see why not, at least in the short term. Even if inflation picks up, it's unlikely to pick up so fast as to obsolete these papers, whose coupons are 4.5%, but are yielding now about 6.2%, tax free, at approximately $78 per issue.

Therefore, I'm officially adding to my position. The only trick is that the market is so illiquid now that these bonds are not being offered on a daily basis. Investors must request offers, which are hard to come by. Patience shall be rewarded.

Disclosures: I own both bond issues mentioned above. Consult your financial advisor before making any investment.

No comments:

Post a Comment