Uncertainty Surrounding Municipal Bonds

March 23, 2011

Municipal Bonds are securities that are issued by state and local governments to fund the governmental unit’s general fund (a “general obligation bond”) or some sort of special project (rebuilding a town’s city hall).  These bonds are secured by the municipality, and are basically mini-versions of U.S. Treasury Securities, albeit more risky.  So, when we hear that a municipality has “gone bankrupt” or “is broke” it effects when and if the municipality can pay interest on the bond it has issued.

More concerning, the Wall Street Journal has just reported about rumblings of trouble in the municipal bond market:

Investors shouldn’t mistake the tranquility for a healthy market, however. Municipalities issued just $28 billion of bonds this year through February, the lowest level since 2000. Without new bonds, investors have a difficult time figuring out where bonds should be trading, so they trade less frequently.

And, the WSJ added that:

Advisers and strategists say investors should use this period of calm to assess their portfolios and make adjustments. Some suggest reducing muni holdings in the short term. “This is a good opportunity to lighten up,” says Jeffrey Gundlach, chief investment officer at bond-fund manager Double Line Capital.

Many conservative investors will have at least some municipal bonds in their portfolios, and it may be a good idea to talk to your advisor/broker about the wisdom in keeping what you have.  Your advisor/broker should be able to explain: 1) why you are invested in these securities; 2) the nature/attributes of each municipality; and 3) whether it’s insured.

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