Municipal Bonds: Ratings look favorable

Moody’s, S&P and Fitch are the companies whose analyses of the legal, contractual and moral promises made by municipal bond issuers result in a scorecard grade that may suggest the likelihood of full and timely repayment of their debts.

First, there are 13 states that garner no less than a triple-A (AAA) rating from one or all of the above agencies. States such as Alaska, Delaware, Georgia, Maryland and North Carolina are part of a subset that have triple-A from all three.

Second, apart from Puerto Rico and other Territories of the U.S., the lowest-rated states are California (A1, A-, A-) and Illinois (A2, A, A). Neither one has anything less than an A- from at least one of the three agencies. In fact, included in the list of the 10 lowest-rated states are New Jersey (Aa3, AA-, AA-) and Michigan (Aa2, AA-, AA-).

The point? Though this just speaks to state issuers, since the bottom of the investment grade range is BBB-, the general quality of bonds appears very strong. As shown in the graph, the average rating among all U.S. states is AA. In the context of a broadly diversified portfolio, the quality could represent a high likelihood of full repayment.

Note:  Anything lower than a Baa/BBB-/BBB- rating is considered a non-investment-grade, high-yield or junk bond.

Source:  James Colby, MarketVectors
  
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