Muni Bonds No Longer a Conservative Investment

It used to be said that only certain types of investments, including the bluest of blue chip stocks, Treasury securities, and municipal bonds, should be owned by those who, like widows and orphans, valued quality and safety above all else.

Given the way that things are going, however, it is getting much harder to make the case that any of those asset classes represents a truly conservative investment choice these days.

For the latest developments in the market for state and local government-issued debt, for example, check out the following Financial Times report, "Muni Bonds Feel US States’ Fiscal Stress":

California’s high-profile budget crisis and the fiscal woes of states throughout the US are taking their toll on the public finance markets, sending borrowing costs higher for states, cities, counties and other municipal issuers...

Yields on California’s long-term muni bonds are hovering at 6.10-6.20 per cent, up from about 5.50 per cent a few months ago and a full percentage point more than most other states. However, they are off recent highs as opportunistic buyers have moved in.

But the uncertainty surrounding the California situation and the publicity that it has received is weighing on the overall market.

Comments

[Choad Mangler:]

I love it. Long CA bonds widen out by 60 or so basis points and munis are no longer a conservative investment. Don't pay attention to the 4% health care surcharge tax about get slapped on wealthy Americans, or the increase in marginal income tax rates that Obama has promised us in 2011. Times could not be worse for tax exempt state and local government paper.

Please sell...and let me know when your list hits the street so I can bid your bonds.

Jul 07 03:32 PM

[whidbey:]

Given the way that things are going, however, it is getting much harder to make the case that any of those asset classes represents a truly conservative investment choice these days.

The conservative investment is one that gets the return of capital, cash. In the deflation and its continuing future one will get about 1.3 to 4% return on cash just sitting still. Of course, it could be more since the CPI has fallen into evil hands I hear. Best on the book.

Jul 07 04:57 PM

[Larry House:]

Good points. If conservative means low risk, I'm not sure even treasuries are conservative any more. This dislocation will create some good opportunities in munis. Not all of them are in trouble.

Jul 08 02:58 PM