Losing income due to inaccurate credit ratings is the largest financial risk municipal investors take, not default risk.
Too many retail municipal bond investors are of the view - "I hold to maturityso a rating downgrade doesn't mean anything to me." To the contrary, when a bond is downgraded it means the holder paid to much for it. The result , lost income, or, for instance, buying a single A rated return but getting triple B risk.
For individuals and advisors who buy or sell municipals in amounts of $100K and more.
Municipal bond pricing and credit spread are more dependent on the issuer paid rating agencies than any other securities market. To play this uniquely opaque ratings game, institutional municipal investors employ credit specialists to increase returns and avoid risk adjusted income loss.
Tax exempt credit spreads can equal 100 basis points, one percent, or more per annum, depending on how the market sees credit risk generally and what bonds are rated. A 50 basis point spread, not uncommon between "A" and "AA" bonds is worth $50,000 in U.S. exempt income on $1 million par over ten years - $10k per 10 basis points.
What is the difference in risk of nonpayment - temporary or permanent - between “A” rated and “AA” bonds and what is the risk adjusted credit spread.
An Imvestment in Performance
A good investment is one where return equals or exceeds risk.