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

Investing in the Primary or New Issue Market

The new issue market for high yield municipal bonds can be a good way of investing in the sector. There are some pitfalls here, too. Often, you are buying into a good story because things have not had time to go wrong. Often, a new issue to finance a startup project will have no track record, so you could be paying full price for a concept or business model that may not work out. That said, the advantage is that you will likely be getting fresh and timely disclosure, at least at the time of issuance. You may also have other institutional investors buying the credit, so you will have others looking at and possibly even negotiating improvements in the bond documents. Of course, the cynical flip side to this could be that misery loves company!

When you try to participate in a large, oversubscribed issue, you may not get allotted any bond at all. In order to secure a decent bond allotment, you will likely need to have a strong business relationship with the dealer underwriting the deal. Also, new issues in this sector sometimes come to market when market conditions are most favorable to the issuer, that is, when yield spreads are relatively compressed versus other bonds. You should ask yourself if that is really the time when you want to buy.

Finally, just because a high yield issue is brought to market by a well-known underwriter does not mean the issue was actually underwritten by that firm, with all the presumed due diligence. Sometimes, ...