It is extremely rare to see a muniland market professional pitch a specific bond to the public. In fact, I’ve never seen an analyst or a portfolio manager do it in the general media. So I was more than a little shocked to see Alexandra Lebenthal pitching a newly issued unrated bond on Maria Bartiromo’s show on CNBC.
Unrated bonds inhabit a dark corner of muniland. An August 2012 study by the Federal Reserve Bank of New York highlighted that default rates for unrated bonds have historically been 36 times higher than rated bonds. Here is how the New York Fed puts it:
Our findings raise the question, what causes such markedly different default frequencies between rated and unrated municipal bonds? Our answer: Not all municipal bonds are created equal. Different types of municipal bonds are secured by very different revenue sources with varying levels of predictability and stability. Furthermore, we believe that rated municipal bonds tend to be self-selected: issuers are less likely to seek ratings if their municipal bonds are not likely to achieve investment grade ratings.
Unrated bonds are the Death Valley of muniland. They should never be promoted to a retail audience. In fact, Lebenthal does a dance trying to buffer the dark alley she is leading her audience down. From the CNBC transcript of Lebenthal:
And I’ve said this a lot over the last couple of years, with all the things that have gone on, I would have a professional managing my municipal money, whether it’s in a mutual fund, an ETF or separately managed account… I wanted to give people an example of what the maximum yields are that are out there. We have non-rated bond, and typically we don’t sell non-rated bonds and wouldn’t normally recommend that, but as you can see, if it’s showing on the screen right now, it’s 100 basis points above the other bond that I have…and — look at the coupon, but what you really want to look at is the yield to call, and that bond is priced to call, so that 4.37 is the yield to call in 2020 or 2022.