Van Eck Global - Since 1955


Got Credit? (Part 1) - Friday, 01/25/2013

One point which I believe is universally made regarding the municipal bond market is that the overall credit quality (the implied security) of the issues brought to the market not only underpins the attraction of municipals as an asset class, but separates it very distinctly from other fixed-income choices.

Moody's, S&P and Fitch are the companies whose analyses of the legal, contractual and moral promises made by issuers result in a scorecard grade that may suggest the likelihood of full and timely repayment of their debts. I think it is a good time to revisit some of these important details, lest we lose sight of what brings strength to this market.

First, there are 13 states that garner no less than a triple-A (AAA) rating from one or all of the above agencies. States such as Alaska, Delaware, Georgia, Maryland and North Carolina are part of a subset that have triple-A from all three.*

Second, apart from Puerto Rico and other Territories of the U.S., the lowest-rated states are California (A1, A-, A-) and Illinois (A2, A, A). Neither one has anything less than an A- from at least one of the three agencies. In fact, included in the list of the 10 lowest-rated states are New Jersey (Aa3, AA-, AA-) and Michigan (Aa2, AA-, AA-).

The point? Though this just speaks to state issuers, since the bottom of the investment grade range is BBB-, one should appreciate that the general quality of bonds appears very strong. As shown in the graph below, the average rating among all U.S. states is AA. Thus, in the context of a broadly diversified portfolio, the quality, in my opinion, represents a high likelihood of full repayment.

The next installment will more fully explore this thesis.

Distribution of S&P Credit Rating by State Table
Source: S&P and First Southwest as of January 22, 2013.

*As of January 22, 2013, the full list of states with triple-A ratings from all three rating agencies includes: Alaska, Delaware, Georgia, Iowa, Maryland, Missouri, North Carolina, Utah and Virginia. The rating scales are as follows, from excellent (high-grade) to poor (including default) for Moody's, S&P and Fitch: Aaa/AAA/AAA to C/D/D, with intermediate ratings offered at each level between. Anything lower than a Baa/BBB-/BBB- rating is considered a non-investment-grade, high-yield or junk bond.


 


 jim_colby_signature 

 

 

Important Disclosure 

Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

Please note that MUNI NATIONs written by Jim Colby represent his opinions and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. © 2014 Van Eck Securities Corporation. MUNI NATION is a trademark of Van Eck Associates Corporation.

All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.

Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.

The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR | 888.658.8287. Please read the prospectus and summary prospectus carefully before investing.  

Not FDIC Insured — No Bank Guarantee — May Lose Value 

Van Eck Securities Corporation, Distributor
335 Madison Avenue, 19th Floor
New York, NY 10017
888.MKT.VCTR | 888.658.8287