Bond Accountability Commission 2 Recommendations Page 78
municipal securities backed by governmental credits, but perhaps above a “BBB”/“Baa3” level. As stated by Municipal Market Advisors prior to rating “recalibrations” 93— Most municipal bonds are rated on a different, more conservative rating scale than corporate bonds. Triple-A US corporate bonds have up to 10x the historical default rate of single-A munis … . Neither municipal issuers, nor the individual investors who own the large majority of outstanding paper or fund shares, understand this point. As a result of the “muni rating scale,”
Municipal Market Advisors, “Corporate Ratings for Munis” (Jan. 17, 2008). See also UBS Wealth Management Research, “Education Note—Municipal bond defaults and bankruptcy: an overview” at 1-2 (Apr. 2, 2009), quoted in n. 91. Municipal Market Advisors—Weekly Outlook (March 22, 2010) stated at 4 that— Moody’s is emphatic that these changes are not upgrades but re-ratings along a new rating scale. Yet higher ratings WILL broaden the universe of investors willing or able to buy the affected bonds, boosting prices and lowering yields accordingly. First among these investors are individuals, who, besides already holding nearly $1T of munis directly, strongly favor bonds rated at or above Aa3 along the front half of the yield curve. Importantly, the prices and evaluations for current high grade paper may fall somewhat as MMD‐eligible trades proliferate across the curve. *** At the same time, these rating changes should facilitate BAB issuance as that product has, so far at least, most benefitted the highest rated issuers … . *** There are also implications for the short‐term market. MMA added— there are already arguments being made that, because it doesn’t move ratings up as far as the original rating map from several years ago, the new Moody’s plan is still not a full reconciliation of municipal and corporate scale ratings. We believe there is something to that argument; however, we also believe that, from this point, it is US corporate ratings which more pressingly need adjustment lower.
Published on May 14, 2014