Can Government Bonds Be Junk Bonds?

As talk about corporate junk bonds rises above a murmur in the investing world thoughts about the relationship of “junk status” to government deficits and debt levels may (should) filter into your thinking about buying government issued and backed bonds.

Take a moment to reflect upon what happened to Detroit’s bond holders by reading this article: Detroit Bond Holders Taught Painful Lesson in Bankruptcy.

Now, take a few minutes to scan, – or better yet, take a few more minutes to read – this little PDF from the Council of State Governments discussing the idea of the U.S. Congress expanding the authority of the U.S. Bankruptcy Courts over State petitions for bankruptcy relief: State and Local Bankruptcy, Municipal Bonds and Pensions.

One quote from the above linked PDF:

The national conversation now underway whether Congress should enact preemptive authority for states to file for bankruptcy is treacherous because of its unintended consequences. The mere existence of a federal law allowing states to declare bankruptcy would only serve to increase interest rates, rattle investors, raise the costs of state government, create more volatility in fi nancial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution.

Now, ask yourself:

  1. Do I know the level of debt already aggregated by the government agency (municipal, county, state, special district, etc) issuing bonds?
  2. Has the existing governing body exhibited a willingness to raise taxes to pay their obligations and fund government programs?
  3. Have I examined the bond rating for this obligation? What about insurance to cover the bond in the event of a default?
  4. Lastly, in the event of a series of defaults how will the insurance stand up? Is there “insurance on the insurance”?

Government backed debt is as secure a debt obligation as you can invest your money in. However, even a government issued obligation is not perfect. So, do your homework. Talk to a professional with knowledge of the government bond market.

 

Preparing Bond Portfolio for Fed Interest Rate Hike

It appears, after years of speculation, that the Federal Reserve is about to raise the Federal Funds Rate. Short term Treasury yields are at their highest levels in years, anticipating this inevitable rate hike. Short-term yields can spike even higher as speculation drives up their price.

Are you ready for this? What can you do?

The bonds likely to see the greatest volatility during this transition are those with medium-term maturities. Why?

Short terms bets have been constantly in play in anticipation of the Fed’s initial move. On the other hand, long-term rates tend to be stable, as time is needed to suss out trends.

It’s the “jittery middle” – where trends are being predicted, trend lines forming,  and consequences of bad decisions are looming larger as the market adjusts to the new reality of interest rates rising – where wisdom – nowadays better known a “better predictive analytics” – is required.

One well know strategy for confronting uncertain interest rates is to employ a “ladder strategy” where investing in financial instruments such as CDs and bonds with different length mid-term maturities can act as a hedge against uncertainty.

What adds further uncertainty – and possibly an investment opportunity – is the current divergence in interest rate moves by central banks across the globe.

Talk to your investment advisor regarding buying or selling government bonds at this time. As is often the case, the smart money (institutional, etc) has likely already placed their bets, but just because one moves first doesn’t guarantee a favorable outcome. Be careful that your decision doesn’t fuel the first movers unwise choice, by affording them a profitable outcome as they head for the exits and you buy in. Do your research. See the big picture. Don’t do what I’ve done too often: invest emotionally or with a shallow understanding.

Talk to your bond investment advisor and ask not only for reports and analysis that speak to current concerns but also for historical data.

How to Invest in Government Bonds – Part 1

The Electronic Municipal Market Access system or “EMMA” is a repository for information about municipal bonds and the muni-bond market. EMMA provides free access to official municipal securities disclosures, trade data, and municipal / government credit ratings.

Public disclosure about bond issuing agencies yields transparency which produces confidence when considering whether to invest in government issued bonds. EMMA seeks to inform and educate retail, non-professional bond investors, that is, those who are not experts.

EMMA’s educational materials, which include videos, cover municipal securities, official statements, advance refunding documents and transaction prices.

EMMA stores municipal disclosure documents, including bond offering documents or “official statements” for most new offerings of municipal bonds, notes, 529 college savings plans and other municipal securities.

EMMA also provides access to advance bond refunding documents. These documents set forth arrangements made to establish escrows to pay-off existing bonds when new bonds are issued. The objective of such arrangements is to enable a public entity or governemt body to refinance debt at a lower cost or interest rate. There are also “continuing disclosure” documents that provide “material information” during the life of a bond. Additional voluntary disclosures may be provided by certain bond issuers.

EMMA also provides real-time municipal bond prices and yields – that is the price and interest rate at which government bonds or notes are bought and sold. This includes data for auction rate securities and variable rate demand obligations.

According to the EMMA website:

“EMMA is a service of the MSRB, the self-regulatory organization that protects investors, issuers of municipal securities and entities whose credit stands behind municipal securities, and public pension plans by promoting a fair and efficient municipal market. The MSRB fulfills this mission by regulating securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. The MSRB has operated under Congressional mandate with oversight by the Securities and Exchange Commission since 1975.”