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Thomas Kenny

Municipal Bond Ratings Don't Tell the Full Story

By November 8, 2012

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When is a lower-rated bond safer than a higher-rated bond? According to municipal bond expert Glen Rosenberg, it depends on what you're comparing. In an article on the market commentary website SeekingAlpha.com, Rosenberg compared the default rates on BBB-rated municipal bonds to AAA-rated corporate issues. The result: BBB-rated munis paid all of their interest and principal 99.63% of the time, while AAA-rated corporates did so 99.35% of the time. In other words, investors were more likely to see a default from the highest-rated corporate issue than they were a municipal bond of lower quality. Why would this be? Rosenberg says it's largely due to the lower supply of munis and the lack of specific municipal-bond expertise among fixed-income managers. And even though BBB-rated munis carry the same default risk as AAA corporates, they also pay substantially higher yields. Keep in mind, however, that funds which are invested in these areas will also be affected by interest rate risk and other factors. See the full article here.

Learn more:

What are the risks of corporate bonds?

What are the risks of municipal bonds?

How do the risks of individual bonds and bond funds differ?

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