In a prior Post, I had suggested that so-called Tax-Free Municipal Bonds, which are issued by State and Local Governments, have risks. ALL Securities have risks! With “Munis”, some of these risks are: Credit Risk (if the S or L Government defaults); Interest Rate Risk (bond prices drop when interest rates rise); the bond market freezing-up (as we saw in 2008-09), etc. So, make sure that you have sufficient liquidity elsewhere in your portfolio.
The linked article, by Mary Williams Walsh, Muni Bonds Not as Safe as Thought, in today’s NY Times, http://www.nytimes.com/2012/08/16/business/municipal-bonds-default-more-than-advertised.html?ref=economy, provides more information on this subject.
The total of all municipal bonds currently trading in the marketplace–both older and new issues–probably approaches (believe it or not) One Million issues. Bonds range from top-rated states like North Carolina, Orange County, Fla., Chicago’s O’Hare Airport, etc. These are generally large issuers that are are economically important. At the same time, there are issues of bonds from small towns, counties with high unemployment rates or ones that finance unimportant local enterprises. As we have recently seen, there are a number of Local Governments that have recently filed for Bankruptcy.
Now, I am not saying to shy away from muni bonds. There are a number of advantages to them; however, it is somewhat of a specialized product. Every securities Broker/Financial Advisor, who has the standard FINRA (formerly NASD) Series 7 License can sell them. The question; however, is do they really understand the Bond Market–and Munis specifically? If your investment goals are steady tax-free income, engage a specialist.
It is important not to merely count on the Credit Ratings, of even the major firms; because, they can be suspect. Focus on large, vibrant areas that are the center for much of the economic activity in their geographical area. Consult with your Financial Advisor; but, be sure to verify their credentials, whether it be municipal bonds or any other security.