Contact

News & Insights

NEWS WRAP Municipal Bonds Warning

What is a municipal bond?

A municipal bond is a form of debt obligation that is issued by a government entity, typically to fund capital projects such as building highways and infrastructure, etc.. When an individual purchases a municipal bond, they are effectively lending money to the issuer and in exchange receiving an agreed number of interest payments over a set period. Once this period comes to an end, the bond reaches maturity, and the bond holder receives a payment equal to the value of their original investment.

There are a number of risks associated with municipal bonds including call provisions which allow the issuer to redeem the bond early, prior to the date of maturity. This may occur when interest rates fall. Investors may lose income and, when the bond is reinvested by the issuer, the bond may then have a lower return.

Alarm bells

Just recently there have been a number of warnings issued regarding certain state and local government bonds. There are concerns that some may actually be laden with risk, meaning that they are far from being the wealth-preserving and income-generating investments they are usually assumed to be. As of October 2019, 108 borrowers who raised cash in the $3.8 trillion municipal market have faced a number of financial difficulties; they have missed debt payments or violated other terms of their bond contracts. This is the highest rate of violations in the last four years and represents a 30% increase from 2018.**

These figures were published by Municipal Market Analytics (MMA) and add to concerns that investment from yield-hungry investors is heightening the dangers of an already challenging market.

According to MMA around 41% of those facing difficulties sold the debt within the last three years. This is way above the historical average and also comes at a time when there has been a surge in impairments. **

“That impairments are rising faster than defaults means that defaults will continue to rise into next year as troubled credit begins to transition to defaults,” an MMA spokesperson told Bloomberg.**

The spokesperson added that the current appetite for risk is “incredible” and, as riskier bonds come to market, it is this factor which is driving the trend of problems occurring faster than usual.

Blacktower in the US

Blacktower in the US can help you decide upon the right mix of assets for your circumstances, financial goals and unique cross-border situation. We are specialists in retirement planning and can help you build the right strategy to best advance your interests.

Contact us today for more information.

Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment advice. Blacktower makes no recommendation as to the suitability of any of the products or transactions mentioned.

* https://www.irs.gov/individuals/international-taxpayers/characterization-of-income-of-nonresident-aliens Accessed 15-10-19

** https://www.bloomberg.com/news/articles/2019-10-08/warning-signs-flash-for-muni-bondbuyers-chasing-riskiest-debt?srnd=fixed-income Accessed 15-10-19

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

Other News

Considering moving to Europe?

Recent years have seen a dramatic increase in the number of American Expats looking to emigrate to Europe, with Portugal, Spain, Italy and Greece proving to be the most popular destinations. With its beautiful and varied landscape, amazing food and fantastic culture, mainland Europe has always been a popular location for expats from the UK, […]

Read More

Financial Advice the Best Insurance Against Emotional Investing

For a long time economists formulated their theories on the assumption that investors behave rationally and make explicable decisions. In fact, this belief helped underpin the very notion of the Efficient Market Hypothesis; a theory developed by Eugene Fama (University of Chicago) and Ken French (MIT), which states that share prices reflect all information which is readily available

Nowadays, even the proponents of EMH know that randomness and irrationality are constant features of investor behaviour, if not the market as a whole. However, such behaviours are likely to prove detrimental to an investors’ long-term financial goals and are precisely why a wealth manager or financial advisor should be considered as an essential part of the investing journey. Professional advice brings discipline and guards against the kind of irrational and emotionally-motivated investment decisions that have the ability to undermine even the best-laid plans.

Read More

Get in touch for more information

To contact us about this or any other news, please complete the form below

"*" indicates required fields

Name*
Hidden
Hidden
Hidden
Hidden

Select your country

Please select your country of residence so we can provide you with the most relevant information: