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Monday, Jul 21, 2014

The Municipal Bond Market is Under-Valued

Misleading mainstream media headlines have created sensationalism in the municipal bond market over the last few years, often resulting in unwarranted downward moves.

However, the majority of these headlines later prove to be frivolous, as many market disturbances are not due to traditional, general fixed-income market conditions or movements in interest rates. In fact, since 2008, the major risk to municipal bond prices has been headline risk.

These sensationalized news stories are typically unfounded and commonly written or submitted by unqualified individuals, predominately by those who do not participate in the muni market.

While uninformed and misguided investors sell during these times, sophisticated and informed investors buy muni bonds.

Why?

When compared to taxable fixed-income investments, municipal bonds offer more than the traditional yield spread. Unbelievably, in many sectors of the yield curve, tax-free muni bonds are yielding more than taxable corporate bonds. This allows High-Net-Worth investors to cushion their portfolio against a future rise in interest rates.

Some quick facts about the muni bond market and why it is so fragile:

  • The majority of individuals who invest in municipal bonds are buy and hold investors.
  • Municipal bonds are bought for income and are not a traditional trading vehicle for individuals. Therefore, major brokerages do not focus on or emphasize the low spread, low profit retail municipal bond business.
  • Municipal bonds provide a much more stable source of revenue than corporate bonds. This is why the muni bond market has less timely news, less complete research and less disclosure than the SEC-registered corporate bond market.
  • Within a given year, only 1% of all outstanding muni bonds trade, which makes pricing inefficient. This fuels unfounded forecasts and sensationalized media articles that scare investors out of investing in muni bonds.
  • The shortage of informed brokers and accurate information provoke investor and financial advisor fear. However, a buying opportunity quickly becomes apparent to the sophisticated investor guided by a muni bond specialist.
  • Sensationalized media has focused on the risk of municipal bond investment instead of the overall safety of the market.
  • Overall, “Baa/BBB” rated municipal bonds have a better safety record than “Aaa/AAA” corporate bonds (Baa/BBB municipals 99.63% vs. Aaa/AAA corporate bonds 99.48%).
  • It is extremely rare for an investment-grade municipal bond to default.

The current municipal bond market offers unparalleled value in distressed municipal bonds that are insured as to the timely payment of interest and principal payment of interest and principal payments by the two largest, financially strong bond insurers (Assured Guaranty and National Public Finance Guaranty).

Insured, distressed municipal bonds are not suitable for everyone. However, for the informed High-Net-Worth investor that understands the risk/reward that these municipal bonds offer may want to investigate as to whether or not they are a suitable addition to the risk portion of their portfolio.

Work with a municipal bond authority and put a municipal bond specialist to work for you today by contacting THE GMS GROUP. We have a number of municipal bond offerings as well as research and reports to provide our investors with the information they need to make smart investment decisions. Contact us today or call 877-467-0070.