Pluses, Minuses for Muni Bonds

It has been shown time and time again that on Wall Street people very often fail to see the thing that is right in front of them.

Jesse Livermore

This is the principle reason why investors must follow money rather then media-driven reality. The ability of money to expand and multiple depends on its ability to discern the truth despite the experts.

The municipal bond market continues to show signs of stress. Rising yields and increasing volatility depict a market once considered boring. This highly unusual action, nevertheless, has gone nearly unnoticed. The bailouts in the EU remain on the center stage for the media outlets. While out of sight and mind may shape perceptions about state of municipal finances, it has no bearing on capital flows. Similar to the weak nations within the EU, capital smells blood in the water. They will press a weak position until a bailout of the State, either direct or indirect, is required.

Investing in municipal bonds used to mean one thing: boring.

Stodgy governments, authorities and municipalities would issue bonds backed by tolls, taxes and other income. The yields weren't always splendiferous, but they were usually tax-free, and the issuers almost never defaulted. The ability to raise taxes helped ensure that bondholders would almost always get repaid.

But a combination of factors has turned the muni-bond market into another white-knuckle investing zone. A number of states (hint: California) face brutal budget equations. Local governments have very challenging pension obligations that will require more muni-bond financing. And the federal government's big spending ways are crowding the fixed-income market

Source: online.wsj.com