Investing in Municipal Bonds: How to Balance Risk and Reward

In my life, I have been a mortgage bond manager, and a corporate bond manager.  I have enough overall experience that I have played in most bond and loan categories, including municipal bonds. Municipal bonds are one place where the competition level is low, and additional knowledge can pay off.  This is particularly true in an era where municipal bond insurance is less prevalent, and as such credit analysis has more value.

Municipal Bonds

 

This book gives you the basics on municipal bonds.  The most basic idea is economic necessity.  Who will be harmed if the municipality in question can’t perform?  If the the answer is “few,” that might not be a good municipal bond to buy, unless there are significant covenants requiring a municipality to raise taxes to pay for the debt service.

Municipal bonds are an unusual market because there are many issuers, purposes, and bond styles.  The dominant non-taxable bonds are only bought by Americans, and sometimes only by those in a given state.

Municipal bonds are also different because most of the bonds issued have long maturity dates.  Municipalities want predictability in borrowing costs; they also match the borrowing term to the length of what is funded, which is typically long.

The book will take you through:

  • Bond types
  • Covenants
  • Types of bonds that are more risky
  • How bonds pay off
  • Taxation of bonds
  • The ugliness of trading municipal bonds
  • The challenge of analyzing municipal economies
  • Basic yield calculations
  • Portfolio management
  • Derivatives — though that was more of an issue in the past

I would highlight one big issue here.  Most small municipal issues rarely trade.  Assembling your own portfolio of municipal bonds is a tough proposition.  Flexibility is required to assemble your own ladder of municipal bonds.

Quibbles

None.  Good book.

Who would benefit from this book: If you are willing to put in the time to analyze what municipal bonds are worthy to be bought, this book will help you.  If you want to, you can buy it here: INVESTING IN MUNICIPAL BONDS: How to Balance Risk and Reward for Success in Today’s Bond Market.

Full disclosure: The publisher sent me a copy of the book for free.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

By David Merkel, CFA of Aleph Blog



About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.