Thought Leadership

Market Review and Outlook 4th Quarter 2007

January 15, 2008

The year 2007 was of historic significance for municipal bonds.  Many of the assumptions that served as the foundation of the municipal market had been compromised.  The events of 2007 highlighted the importance of a disciplined risk management process.  The year began with tight spreads, investor complacency towards credit risk, and a market operating on the assumption that the work of bond insurers and credit ratings agencies could protect investors from risk.  As a result credit risk was mispriced, and yield differences between higher and lower quality rated instruments was minimal.  Furthermore, many securities rated AAA truly did not deserve this designation as experience would show.  Investors learned they could not rely solely on rating agencies and bond insurers to preserve their principal against credit risk and spread volatility.