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

Foreword

Municipal bonds have generated considerable attention in the securities marketplace in recent years with heightened worries about potential default and bankruptcy risk. Much of that concern was directed to economically stressed governmental bodies that have an overhang of pension and benefit liabilities. The verdict is still out as to whether governmental distressed situations turn into occasional or widespread defaults or bankruptcies. In either case, the potential for a squeeze on preserving operations at the expense of covering liabilities in a slow-growing economy will tempt more discussion about worst-case outcomes—pushing up yields on the relatively more troubled municipal bond credits. If that happens, the universe of higher-yielding bonds is likely to expand, even if the number of actual cases of default or bankruptcy grows only modestly. For much of the past three decades, this higher-risk, higher-yield segment of the municipal bond market has encompassed a narrower list of credits, comprised largely of nonrated and mostly nongovernmental-type securities.

While the spotlight of this book is on the smaller, weaker tier of municipal bonds, it should be noted that most municipal bonds are still considered sound credits. Their historically low default rate has been largely attributed to the strength of their security provisions tied to taxes or user fees derived from municipal enterprises, from water and sewer authorities to transit agencies. Risk-averse investors ...