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Financial crisis effect on muni bonds
Old 09-23-2008, 04:16 PM   #1
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Financial crisis effect on muni bonds

What effect will the current crisis have on municipal bonds and muni bond funds?
Sure a few municipalities will probably declare bankruptcy, but what else?
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Old 09-23-2008, 05:43 PM   #2
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Bond insurers would start circling down the drain.
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Old 09-23-2008, 08:42 PM   #3
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For quite some time there has been plenty of uncertainty in the muni bond market regarding the financial health of muni bond insurers. This has led muni bond yields to increase (to compensate for the additional risk) and prices to fall. This in turn has led some contrarian investors to snap them up as a 'good deal'.

Traditionally, munis have been considered relatively safe because most of them are backed by the taxing authority of municipalities. Right now, municipalities are cutting staff and expenses as tax revenues fall, but I don't see much risk that they will begin defaulting on their financial obligations. In an economic climate like we have today, questioning all assumptions may be a good way to stay alive, so I'm keeping a close eye on the muni market.
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Old 09-23-2008, 09:04 PM   #4
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I have most of my cash in municipal MM for the "tax-free" benefit. I noticed today that the muni interest rates are even above taxable MMs - by quite a bit in fact. This seems pretty bizarre to me. It seems that money markets backed by munis would be "safer" in this environment than those backed by commercial paper. In the big picture it should take much longer for municipalities than corporations to feel a squeeze from declining real estate. Is this just a bizarre function of the bond insurers? In which case it would seem to me that bond insurers are worse than useless in this scenario.

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Old 09-23-2008, 09:31 PM   #5
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Quote:
Originally Posted by audreyh1 View Post
I noticed today that the muni interest rates are even above taxable MMs - by quite a bit in fact. ... Is this just a bizarre function of the bond insurers? In which case it would seem to me that bond insurers are worse than useless in this scenario.
I've read articles in the popular press to that effect - the market is pricing the bonds as if there's no insurance. Some folks view the kind of yield spreads available today as irresistible. When muni yields fall back to normal, the price of the bonds will increase - very nice.
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