Moodys and Fitch, two bond rating agencies plan on restructuring how they rate municipal bonds. For those of you who are unaware what these bonds are, municipal bonds are issued by states, counties and cities for projects and improvements. Part of President Obama’s efforts to rebuild America, municipal bonds are offered to the investment public as a way to invest in their communities, often on a tax-fre basis. Bonds have become a large part of many retirement plans.
The change in ratings will have two effects. Individual investors will see the overall ratings of these issues increase, giving them a closer comparison to those debt instruments issued by corporate America. The second effect is much less clear. Municipalities calculate their budgets based on these ratings, considering how much tax dollars will be allocated to pay investors. If the bond ratings are higher than normal, this may prompt some bond issuers to take more risks with as yet uncollected revenue.
If you hold these bonds in a mutual fund, your manager will probably make an assessment on their own. Institutional investors will not change their views either. But the individual investor, as is often the case, will not be able to see this investment as clearly as before. Keep in mind that it was these agencies that gave mortgage backed securities a better than truthful rating leading to the downturn.
More from Daisy Maxey on this recalibration of municipal bonds.
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