The Fundamentals of Municipal Bonds
The Bond Market Association's primer; the standard entry point.
Summary
This is the reference work on American municipal bonds, produced by the Securities Industry and Financial Markets Association and its predecessor and revised across editions. Judy Wesalo Temel edited the fifth edition.
The content covers the market systematically. It sets out the issuers, from states and cities through school districts, utilities, transport authorities and conduit issuers on behalf of hospitals and universities. It distinguishes general obligation bonds, backed by taxing power, from revenue bonds, backed by a specific project's receipts, and explains the credit analysis each requires. It covers the tax exemption that defines the market, the federal rules governing which issues qualify, the alternative minimum tax treatment, and the state tax position. It covers the issuance process including the roles of underwriters, bond counsel and financial advisers, competitive versus negotiated sale, and official statement disclosure.
The analytical chapters cover credit ratings and their meaning in the municipal context, insurance and its collapse after 2008 when the monoline insurers lost their own ratings, derivatives and swaps used by issuers, the secondary market and its illiquidity, and the disclosure regime under Rule 15c2-12. The book is written for practitioners and assumes a working knowledge of fixed income. Editions matter, since tax law, the insurance market and disclosure requirements have all changed materially.
Key takeaways 7
- General obligation bonds are backed by taxing power while revenue bonds are backed by a specific project's receipts, and the credit analysis differs entirely.
- Federal tax exemption defines the municipal market, and the rules determining which issues qualify shape what gets financed.
- Bond insurance collapsed as a credit enhancement after 2008 because the insurers lost the ratings they were selling.
- Municipal credit ratings historically used a different scale from corporate ratings, which made comparison across markets misleading.
- The secondary market in municipals is illiquid and priced by dealers, so retail investors pay spreads they cannot observe.
- Conduit issuers lend their tax exemption to private borrowers including hospitals and universities, whose credit is what actually backs the bond.
- Disclosure in the municipal market is governed by a rule imposed on underwriters rather than by direct issuer obligation.
Who should read it
Practitioners and investors in American municipal debt who need the market's structure, tax rules and credit analysis in one reference.
Where it sits in the reference 2
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