Investing in Municipal Bonds – How To Hedge The Risk?

Investing in Municipal Bonds

Investing in municipal bonds is a must for many investors, for a number of reasons. How can you hedge the risks involved with these bonds though? There are a number of steps that you can take before investing to minimize the risk level, and the fact that they are municipal bonds means that they already are considered a lower risk than most corporate bonds. High yield municipal bonds can seem very attractive because of the higher yield that they promise, but it is important to remember that the higher yield also means higher risks. One way to hedge against risk when investing in municipal bonds is to invest only in bonds which have a top credit rating, because this means a very small risk of default.

Many California municipal bonds are ignored by some investors because of the economic troubles that seem to plague this state. California has the lowest credit ratings out of any state in the USA, and for this reason many investors avoid these bonds. Investing in municipal bonds to diversify your investment portfolio can also minimize the risks taken, because diversification will prevent large losses most of the time. Zero coupon municipal bonds can also be used to hedge any risks, because they have a guaranteed face value at maturity and are purchased at a large discount. When held to maturity there is a guaranteed redemption value for these bonds regardless of market conditions.

One way to hedge risks when investing in municipal bonds is to ladder the maturity dates of the bonds held in the portfolio. By purchasing bonds with laddered maturity dates you have the option to use any returns and reinvest them if the current rates are higher. If this is not the case then you can use the returns for another investment type instead. Careful research and evaluation will also lower the investment risks, because only the best municipal bonds should be included in your portfolio. Look at all the factors for each bond before choosing the right ones.