Buying California Municipal Bonds: 10 Tips

When buying California municipal bonds, these 10 tips will help you make the smart decision. The savvy investor banks on the Golden’s State’s ability to stand behind a local government, school district or even power district. While the sale of the bonds funds the upgrade or initial building of public infrastructure, the bond holder is in possession of a financial instrument that is inherently safer than a hot stock tip.

1. Creditworthiness has little impact when buying California municipal bonds. Currently, Fitch rates California with an A-, which is the lowest rating out of any one of the 37 rated states. Even so, this translates in a high credit quality and therefore low default risk. Unless the rating slips to a BBB, there is little to worry about.
2. If the A- rating is affecting your investment decision, consider that general obligation bondholders are second on the list of debtors an insolvent municipality must satisfy. First in line are the schools.
3. Look for a distant maturity date. Buying California municipal bonds is a long term investment and the further in the future the maturity date might be, the more profit the investor stands to receive. California bonds typically feature one year to 30 year maturity dates.
4. Should the savvy investor gamble on variable interest or stick with the safer bet of fixed interest? Maturity dates may make this discussion moot; whenever possible, opt for the fixed interest, following the ‘bird in the hand’ versus the one on the roof principle.
5. Yes, buying California municipal bonds does allow the investor to sell early. Unfortunately the brokerage fees and possible tax penalties negate any profits. Look for other investment tools when hoping for a more short term approach.
6. Tax exempt interest makes buying California municipal bonds an excellent choice for the in-state investor. Interest earned is tax exempt by the federal government and also the California Franchise Tax Board. The out-of-state investors lose this latter advantage.
7. Buying California municipal bonds during a primary issue can be more costly than waiting for them to be traded on the secondary market. The latter occurs when an investor decides to let go of the bonds prior to the maturity date. Depending on the desperation of the seller, these bonds may go for pennies.
8. While likely saver than the stock market, buying California municipal bonds do not come with a guarantee!
9. Investors in a high tax bracket realize a greater savings from tax exempt bond investments than those in a low tax bracket. When picking investment vehicles solely because of tax exempt status, keep this in mind!
10. Last but not least, the price of California’s bonds is not always the face price, even during a primary issue. It is not unheard of to have a 90 sale, which means that a $500 dollar bond costs 90 cents on the dollar rather than 100.

It is obvious that buying California municipal bonds is a good deal all the way around–if the investor takes the time to educate himself first!