The GMS Municipal Bond Four Category Approach
A GMS Aggressive Bond is one that offers above-average returns in relation to similar investment grade bonds. This occurs most often because of political reluctance to address pension and budget deficits which often results in negative headlines and increased volatility.
Aggressive Bond investments are usually found in the Baa/BBB to A3/A- ratings categories. An investor must be willing to take on the additional market and liquidity risk that comes with headline risk. These risk factors are reflected by higher yields and expose Aggressive Bond investments to considerably more price volatility than one would expect from a Conservative Bond investment. Aggressive Bonds are very rarely in any real danger of missing a scheduled interest payment.
Aggressive Bond Investment Risks
A major risk that an Aggressive Bond investor will face is the potential for the bond’s rating to be downgraded. Large firms may frown upon Aggressive Bonds, or in some cases recommend selling the bond simply to not have to go through the expense of creating infrastructure to educate their thousands of brokers as to the explanations associated with this type of investment.
An Aggressive Bond investor should expect volatility in both directions - up and down - and understand that information and comments may be interpreted differently by journalists and others who do not specialize in muni bonds. A negative spin on financial information creates headline risk that can cause extreme volatility. Only funds that do not require “reasonable price” liquidity should be used to purchase Aggressive Bond positions.