Advisors should use caution when using non-rated, high-yield municipal bonds because of the considerable risk involved, experts said in a recent webinar.
“High yields is not a do-it-yourself asset class,” Steve Winterstein, head strategist for municipal investing at Wilmington Trust, said during the S&P Dow Jones Indices webinar yesterday.
Panelists said high-yield munis require a high level of expertise and due diligence on the part of anyone recommending them.
“If investment-grade munis get a cold, high-yield munis go to the hospital,” warned John Keller, vice president at State Street Global Advisors.
Non-rated municipal bonds account for 50 percent of the high-yield muni market and 86 percent of the defaults of all municipals, noted Jim Schwartz, Blackrock Funds head of municipal credit research.
“Non-rated munis tend to be more volatile and less liquid than rated munis. There’s not a lot of price transparency,” he said.
When a municipal bond is not rated, it is usually because the issuer couldn’t get an investment-grade label for the debt, said Tom Metzold, Eaton Vance Management co-head of municipal investments.