Aftershock: Protect Yourself and Profit In The Next Global Financial Meltdown, Second Edition

What about Municipal Bonds?

Municipal bonds, which include state, local, and special tax districts for baseball stadiums, etc. are increasingly in the news. Analysts are comparing Greece to California. But so far, the threat to municipal bonds is still relatively small. Most of the trouble muni bonds are having now is due to special circumstances that are compounded by the slow economy. It is true that the muni bond default rate has more than doubled recently, but if your bond holdings are in a diversified bond fund, these defaults will have little impact. So far, there is not a major threat.

Although the short-term outlook for municipal bonds is okay, the long term outlook is not. State and local governments have taken on a massive amount of debt that they can only pay if the economy recovers. In fact, the amount of debt states owe has more than doubled in the past 10 years from $1.1 trillion to $2.3 trillion. Some states, such as New York, are now borrowing from their pension funds to fund general expenses. Those problems are already pressuring muni bonds, in many casesmaking them unattractive investments. More importantly, if the economy does not significantly improve, and it probably won’t as the bubble continue to pop, many state and local governments simply won’t be able to service their debt putting much greater downward pressure on muni bonds. Later on, when there is any major threat of default by a major state or local government, the Federal government will almost certainly ...