Municipal bonds are at risk of being downgraded two or more notches this year, which could have a big impact on prices.
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The Dodd-Frank Act requires ratings agencies to review their methodology for credit ratings annually, points out Peter Hayes, head of municipals at BlackRock Inc.
That could result in “super downgrades” for municipal bonds because the spreads between higher-rated municipal bonds and less-than-investment-grade ones are “dramatic,” so a severe downgrade could significantly affect prices, Hayes says.
Muni bond investors will also have to consider the effect of likely tax policy changes, which should become clearer in the second half of the year, he added.