Lonestar1

Some Positives About Municipal Bond ETFs

you have to get a real broker to call the retail trading desk of the dealers to find some pre-refunded bonds. Be careful to check if the bond is backed by Treasuries. A small percentage of pre-refunded bonds are backed by Freddie or Fannie papers.

I don't know any closed or mutual funds are pure preres. Short duration funds may have a good percentage of preres. Again, I don't really like mutual funds in this environment.

Some Positives About Municipal Bond ETFs

There are some pockets of munis that are good, such as pre-refunded bonds, which are really the same thing as Treasuries mostly, but tax free. The issuer can not touch the debt service accounts.

I would be more interested in buying short term, best credit munis or pre-refunded bonds, not mutual funds. One must understand that MUTUAL FUNDS HAVE NO MATURITIES. If I hold a 5-year Virginia state go bond, i would be made whole in 5 years + all the coupons, unless Virginia goes belly up. Even if hyperinflation occurs, I still get back my money. But if I buy muni mutual funds, and hyperinflation occurs, my NAV may follow the pattern of MSFT after year 2000.

A friend told me that she was advised by her broker to buy a muni mutual funds in 2007, and lost about 40% by the end of 2008. Can you expect the broker to explain to her what happened given the huge decline in interest rates? I believe the broker has no clue, either. Many wealthy families were inflicted with such damage by a product they traditionally had a good faith in. It is fair to say that that faith is not there any more.

Regarding the defaults scenario, I agree the gov will have to do something before too late.

Some Positives About Municipal Bond ETFs

Frankly, the muni market is just another subprime market to explode in 2009. The only positive is the possibility of bailout by Treasury or the Fed. The Treasury bailout would blur the political structure of the nation, while the Fed lacks the legal authority to step in. The Congress is trying to solve both issues in its proposed new bill.

Muni ETFs are way over priced, if you look at the underlying bonds. The bottom line is this: without bailout, defaults should be massive across board. At states level, mere reduction of work force (20% ?) or services, won't do it.

Deleveraging has and will continue to cause much more pain. In fact, theortically one can not deleverage a system which is so highly leveraged. Either more capital is found, or, asset prices have to come down to appropriate levels.

For munis, those 5% or 7% after tax yields are not attractive if defaults are a possibility. High yield market can offer high teens, and still have no buyers. I have heard some convertible bonds offer more than 50% yields, but nobody cares.