BondGuy

Irrational Stupidity

Maybe you are worried that buying the bonds from, for example, the ninth largest economy in the world, California, backed by one of the wealthiest tax bases in the world, with a constitution that explicitly prohibits defaults on the state's bonds, to be an irrational investment. Most people would consider a state guaranteed taxable equivalent return of 9.5%, a number that is higher than the long run expected return on the S&P 500, to be a once-in-a-lifetime opportunity. You are certainly entitled to disagree with the once-in-a-lifetime opportunity argument, but if you think this is the most irrational bit of exuberance out there, I suggest you try getting out a little bit more. The fact is that the rate of default on high quality municipal bonds is 1/4th that of the highest rated corporate bonds put out by bellwethers like GE and Microsoft. I'd call that type of investment pretty rational.