Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Tuesday, July 27, 2010

Municipal Debt Worries Overblown

Now, this is outside of any official capacity I have with the State of Wisconsin and I personally own no municipal bonds, but I do think it is important not to fall victim to scare tactics. For weeks and even months, there have been numerous attempts to prompt a run on the municipal bond market. The simple truth is that worried are far overblown. This article from last week expresses the view of one firm, but I think it is correct: http://www.businessweek.com/news/2010-07-20/insurers-risk-of-municipal-debt-defaults-overblown-fbr-says.html

Neither I nor most readers of this blog have much use for municipal bonds since the tax-free status of the interest on most issues means very little to us. There are online calculators all over the place that help assess at what rates tax-free versus taxable bonds make sense at given income levels and I won't get into that now except to say that if you don't know if buying municipal bonds makes sense to you, the odds are that it doesn't. However, the issue as to whether or not there will be hundreds of billions in defaults that will cripple the balance sheets of insurance companies like Aetna (AET) and WellPoint (WLP) or possibly bank balance sheets is worth mentioning.

The simple truth is that most municipal and all state governments have very robust provisions to insure the timely payment of debt service. California proved that in spades recently. Some special districts with limited taxing authority have defaulted and many more probably will, but in terms of large scale general obligation bond defaults, that's a very unlikely scenario indeed. If you are looking for the "next shoe to drop", this is not it.

1 comment:

  1. Agreed. Hedge funds are having too much fun making a run on munis