Friday, January 21, 2011

Crisis of confidence in muni bond market

Once the domain of the rich and "widows and orphans", the municipal bond market is "guaranteed" tax-free income no more

As cities and states continue to face a severe economic environment and huge budgetary shortfalls, the evidence of waning investor confidence can be witnessed in the magnitude of outflows from municipal bond funds. While general obligation bonds are more secure than revenue bonds, all sectors are being hit.

One possible haven? If you can find them, pre-refunded municipal bonds secured by treasury bonds.

From the Financial Times:

"... Nonetheless, mutual and exchange-traded funds that invest in municipal bonds saw outflows of $4bn in the week ended Wednesday, according to Lipper, the fund tracker. The redemptions beat the previous weekly record of $3.1bn in November.

Investors have withdrawn more than $20bn from muni funds in a 10-week losing streak sparked by rising benchmark interest rates and predictions that fiscal problems around the US could result in a spate of local defaults as soon as this year.

Muni market experts have repeatedly urged calm, pointing to a history dating back to the 1930s when states and cities have honoured their debts in spite of economic ups and downs..."

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