With the possibility of a recession staring us in the face, buyers of municipal bonds must become credit conscious.
Credit risk refers to the ability of bond issuers to pay interest and principal. For general obligation issues, that ability depends on sufficient tax revenue; in the case of revenue issues, it would be sufficient revenue from a particular project.
Now is the time to review portfolios, weeding out the weaker credits and adding stronger ones. There are many large issuers under the gun: New York City, Philadelphia, East St. Louis and Massachusetts. There are other issuers facing the prospect of red ink: Minnesota, Connecticut, North Carolina, Maryland and possibly Virginia, New Jersey and West Virginia.
The responsible issuers will solve their fiscal problems, and most states are required by law to balance their budgets. But some of the same old names keep popping up, like New York City.
Currently, it would be wise to avoid the issuers in the Northeast and Midwest. More desirable issuers would be from the Pacific Northwest, followed by the Southeast. Look for high-grade issuers with widely diversified economies from which to generate revenue, like states, large counties and cities.
Avoid issuers that have a narrow revenue base, such as hospitals or housing issues, smaller local water districts or small one-industry towns.
Trade out of your bonds with undesirable credit pictures, and simply don't buy weak ones, because you are not receiving enough yield to justify the greater risk.
Some high-grade, AA-rated electric revenue issues that you might consider for more yield: Salt River Project in Arizona; Southern California Public Power Authority; Jacksonville (Fla.) Electric Authority; Omaha Public Power District; San Antonio Electric and Gas; Intermountain Power Authority (Utah); and Seattle City Light Department.