Nov 18, 2010 Muni Bonds Flailing

The past few weeks have dropped muni bond values by 5% but probably without alarming long-term investors. They simply collect interest and look at their value when the monthly statement arrives via snail-mail. 

If you have any doubt about the severity of what lies ahead, examine the exchange traded fund MUB. 

In the credit default swap market, California is less risky than Ireland or Portugal but more so than Spain and Italy. Ever the optimists, California sells bonds against taxes that have yet to be collected. (Revenue Anticipation Bonds – RANs). OOOPS! The buyers aren’t as eager as in past auctions.

RANs are similar to individuals using Paycheck Loans to “straighten out their finances.” Illinois is in worse shape than California.Michigan, New York, New Jersey and Nevada are close behind but still worse than Italy.

The safety of tax free bonds will soon be an illusion. However, yields will spike providing attractive re-entry points to build quality tax free income.

The run on Washington Mutual will look tame when investors begin liquidating municipals en masse. Once a state heads over the cliff, others will be close behind.

Stay alert.