In this recession, states and cities are suffering from lower tax revenues. This weakness, in turn, might make it more difficult for issuers to pay bond holders. Standard & Poor’s downgraded 466 municipal bonds in the first half of the year, compared to 262 downgrades for all of 2008.
As a result, investors have poured money into the highest-rated and presumably safest municipal bonds. The demand for such bonds have driven up prices and depressed yields. Triple-A-rated, short-term municipal yield around 1 percent, a third of what they yielded last October.
However, there are still opportunities in the muni market. Double-A and single-A munis maturing between 10 and 20 years now yield as much as 5 percent, tax-exempt. To be safe, look for so-called general obligation (GO) bonds that fund essential services such as water, sewer, and utilities, backed by the issuer’s full taxing power.
