What Citifield bond downgrade means for muni investors
Citifield is the NY Mets new ballpark. It was financed with municipal bonds. Those bonds were "downgraded" to junk status. Why? They were insured bonds and the insurance company itself was downgraded. Along with the announcement of the downgrading was a comment that there was no reason to believe payments would not continue if you hold these bonds.
I don't know about the payments continuing, but this is a good example of the dilemma you face today when you invest in municipal bonds.
As opposed to U.S. treasuries, municipal bonds are not "guaranteed" by the Federal government. They can default - in which case you may not get either your interest payments or the return of your principal.
Historically, very few muni bonds have ever defaulted. But, given our current crisis, we can't be complacent.
In addition to this particular downgrading, Moody's, a company that rates the credit quality of muni bonds has ALL muni bonds "on watch." They may downgrade ALL muni bonds at some point.
The key for anyone investing or considering investing in muni bonds is not necessarily to avoid them. It is that you must monitor the credit quality of the bonds you hold - something you should always do but which is now critical.
Since most people can't effectively evaluate the credit quality of municipal bonds on their own, you'll need professional help in this area. Just buying municipal bonds from a broker and collecting your interest may have worked in the past, but it won't now. Unless your broker is a credit analyst who will monitor the bonds (and he/she should charge a fee for this service), you'll need to use a firm that can provide this service.
I don't know about the payments continuing, but this is a good example of the dilemma you face today when you invest in municipal bonds.
As opposed to U.S. treasuries, municipal bonds are not "guaranteed" by the Federal government. They can default - in which case you may not get either your interest payments or the return of your principal.
Historically, very few muni bonds have ever defaulted. But, given our current crisis, we can't be complacent.
In addition to this particular downgrading, Moody's, a company that rates the credit quality of muni bonds has ALL muni bonds "on watch." They may downgrade ALL muni bonds at some point.
The key for anyone investing or considering investing in muni bonds is not necessarily to avoid them. It is that you must monitor the credit quality of the bonds you hold - something you should always do but which is now critical.
Since most people can't effectively evaluate the credit quality of municipal bonds on their own, you'll need professional help in this area. Just buying municipal bonds from a broker and collecting your interest may have worked in the past, but it won't now. Unless your broker is a credit analyst who will monitor the bonds (and he/she should charge a fee for this service), you'll need to use a firm that can provide this service.
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