I’ve written about buying municipal and state bonds in the past but I’ve never actually done it. When reviewing Maryland bonds, the rates just didn’t seem high enough for me (I’d looked at investing directly with the state through one of their partners and at buying bonds out in the market) so I never did it.

While I never thought about municipal bonds defaulting, I knew that it was a possibility. Certificates of deposit are backed by FDIC insurance. Treasury bonds are backed by the Federal government. If the Feds defaulted, I’d have bigger problems than losing what little I invested in those two vehicles. With municipal bonds, backed by states and counties, the default risk is very real.

Just last week, commissioners in Jefferson County in Alabama voted 4-1 to default on $3.14 billion in municipal bonds. The bonds were to fund a sewer renovation and commissions had approved a plan, back in September, that would avoid this that included $1.1 billion in concessions and a sewer rate increase of up to 8.2% over the first three years. Creditors wouldn’t agree to those concessions, the county legislature couldn’t pass a bill, and so now it appears the county will default.

While this particular default made headlines because of its size, the article goes on to discuss other defaults. Jefferson County is just the 11th this year and beat the previous record set by Orange County, California in 1994. In that default, there were $2.2 billion in debt outstanding.

Last week I was volunteering at Meals on Wheels when one of the other volunteers, Cheryl, asked me about buying state bonds. Until last week, I hadn’t really given it much research because the idea of buying individual bonds was never tremendously appealing. There is a big barrier to entry when you’re buying individual bonds and it’s with the minimum purchase amounts. In Maryland, if you buy the bonds from the state through a broker, your minimum buy is for $5,000 and your purchase must be in increments of $5,000. However, you can buy them in smaller increments on the secondary market so I thought I’d give it a look for this Foundation series post on buying municipal and state bonds.

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I discovered this very informative article, “No-Stock Portfolio,” via Tip’d this weekend and it really gave me a stronger sense of the number of non-stock investment options there are out there. So often I get stuck in the mindset that “investing” refers to either the stock market or real estate when the area is so much larger. Jeffrey Kosnett, the author and a senior editor at Kiplinger’s, goes into a sample portfolio you could build of non-stock investments, he calls it his Tofurky Porfolio (meat that isn’t meat!), and I think its value is in the investments he outlines and not in the percentages he selects.

These are not recommendations, just a listing of non-stock investment options that are available.

The investments he describes were:

• Blue-chip IOUs: These are high quality corporate bonds from companies that have been beat up lately.
• REIT Preferred: Real estate investment trust preferred stock. It’s stock but they are senior to common stock and you get dividends first. One of the companies he mentioned, COPT, owns pretty much every building I’ve ever worked in for the last 5 years (well, except my house).
• Energy: Specifically funds that track oil and natural gas commodities. Oil is down pretty big right now with the fears of a world-wide recession, but you know the black stuff can’t be held down for long.
• Tax-free income: These are tax-exempt bonds like state and local municipal bonds (muni’s). For a little while I was in Vanguard’s tax exempt money market but the yield on that baby pretty much dried up.
• Gold: Another commodity, gold is always a favorite because it’s a hedge against inflation (which we will probably see quite a bit of once the recession subsides, you don’t print money without having some sort of risk). If the idea of gold, or other such commodities, interests you, one of the better books on the subject, including detailed how-to’s, is Peter Schiff’s Bull Moves in Bear Markets.

I’ve been interested in getting more involved with higher yield bonds, either corporate or muni’s, as their yields often beat the best certificate of deposit and high yield savings accounts rates. There’s risk involved, CD’s and savings accounts are FDIC insured and bonds can default, but I would imagine muni’s are pretty safe.

I can’t, for the life of me, figure out how I can buy individual municipal bond. When I do a search, I’m inundated with mutual fund companies with Maryland municipal bond funds, but no way to buy an individual bond. Is this a sign that I should be buying individual muni’s or am I just looking in the wrong place? If Vanguard had a Maryland muni fund I’d be all over it but they don’t and the thought of opening yet another account is unappealing.