Key takeaways
- Ratings are a great place to start—but they’re snapshots, so strong muni investing means keeping up with character, capacity, and capital as the story evolves.
- Munis trade over the counter, so information and liquidity aren’t always evenly distributed—doing the homework goes a long way.
- Credit research is about the path, not just the destination—watch the early warning signs, keep a margin of safety, and don’t be surprised when headlines move markets.
In 2025, BlackRock saw a plateau and normalization of credit quality from unusually strong post-pandemic levels. With such tailwinds headed into 2026, there is nothing to worry about from a credit perspective, right? Unfortunately, credit ratings represent a snapshot in time, and need to be reassessed on a regular basis, but how?
Imagine three siblings came to you to borrow money, but you had enough to lend to only one sibling, how would you choose? You’d weigh trustworthiness, ability to repay, and financial cushion—the same “3 C’s” used in lending:
- Character: willingness to repay, reflected in history, transparency, and governance)
- Capacity: ability to service debt from stable cash flow, considering income and leverage
- Capital: financial stake and loss-absorption before creditors are harmed
Whether you’re financing a home, buying a car, or applying for a credit card, one factor ties it all together: your credit score. Imagine again, those three siblings have their credit score posted on their shirt, this would certainly help shorten your review process. Credit scores are just aggregated data from lenders and public records looking at payment history, leverage, and borrowing behavior—ultimately defining borrower quality and borrowing costs. Municipal bond ratings work the same way: the major rating agencies act as credit bureaus, assigning ratings that directly influence yields. AAA rating is akin to an 850 FICO score—highest quality, lowest borrowing cost—while a low or unrated issuer resembles subprime credit with higher risk and funding costs.
So—is picking municipal bonds as easy as sorting by credit rating? If it were, I’d be updating my resume. The reality is that credit work has to go beyond a static grade: investors need to gauge not only a municipality’s ability to pay, but also its willingness to take action when conditions get tougher—so proactive, forward-looking research really matters. And because munis trade over-the-counter (not on a centralized exchange), the market can be a bit of a patchwork: disclosure isn’t always consistent, liquidity can vary a lot bond-to-bond, and two bonds that look almost identical on paper (same state, maturity, even rating) can behave very differently when markets get choppy. Comparing the municial bond market to the corporate bond market, it becomes clear that while smaller in size, it is larger in issuer diversification. The tens of thousands of municipal issuers – states, cities, schools, utilities; GOs vs. Revs; all varying drastically in size and scale – make it difficult to have exact uniform disclosures. That’s why credit analysis is not optional in this space.