Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

CHAPTER 4

High Yield Credit Risk Revisited: The Default Record

Having reviewed the return potential of the high yield municipal sector in the last chapter, we now turn our attention to the flip side of the equation: credit risk. The mutual fund industry routinely makes the case for high yield investing by quoting the low default rates experienced by the tax-exempt asset class as a whole. This is, of course, a bit misleading. High yield muni investors, by definition, deal primarily with the lower-rated or nonrated part of the tax-exempt market, a market segment that displays extremely different risk characteristics. So how risky are high yield municipals, really? As it turns out, riskier than commonly believed, but still largely commensurate with the historical returns, as long as investors can manage to steer clear of certain sectors with chronically high default rates.