Municipal Defaults Triple

Over the past few months, I have expressed my hesitation in investing in any municipal bonds or bond funds. Many readers have emailed me regarding my thoughts on various opportunities in that arena.

I believe that the continuing fallout from the Subprime/credit/real estate crisis will have negative economic effects with the exact extent still being ahead of us. One “casualty” of reduced revenues due to weak real estate prices and record foreclosures will most likely be those municipalities with weak balance sheets, which covers just about everybody.

The first county to fail was Vallejo, California, but Jefferson County in Alabama faces its own set of problems along with many others that are still unknown. Mish at Global Economic Trend Analysis had some updated information on the tripling of Muni defaults this year over 2007.

Here are some highlights:

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the “Distressed Debt Securities” newsletter, published in Miami Lakes, Florida.

That $736 million is nowhere near the record for municipal bond defaults, to be sure. The record year, if you’re counting, was 1991, when almost $5 billion went bust. That’s still small potatoes compared with what happens over in the corporate-bond market, where $36.6 billion blew up in 2006, and almost $24 billion in 2007.

But wait a minute: Municipal bonds never default, do they? Or at least this is how they are perceived by individual investors, right?

We’re probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

I have to admit that I am uncertain as to how deep and lengthy the effect on municipals bonds/funds will be. Given that uncertainty, my personal view is that I’d rather not invest in anything that currently has such a potentially negative outcome; I suggest you do the same.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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