MUNI Bonds Have Jumped the Shark

by Darwin on January 13, 2011

On November 22nd, I penned an article at ETFBase entitled Muni Bond Market Imploding.  While I was derided for my call at SeekingAlpha and other outlets that syndicate my content for calling the top, the muni market has in fact, begun imploding.  Like clockwork, Meredith Whitney appeared on 60 minutes (Day of Reckoning) sharing with the country and absolute shambles that various states and municipalities find themselves in.  Illinois for instance, is literally a deadbeat state.  They cannot and do not actually pay their bills.  As though is this is to fathom, there are hundreds of business and thousands of people that are literally owed money by the state.  So, what does Illinois do?  Rather than cut spending and entitlements (which is the real problem), they raise taxes by the largest amount ever for any state – a record.  This tax increase will just chase business and dollars out of the state, further impairing it – all while keeping enough voters happy by not touching entitlements.

Muni Bond Funds Dropping

Since the initial date of publication, the oft-cited benchmark muni bond ETF (NQI) has dropped 8%.  This, while the S&P500 has rallied 7%.  Not that they’re supposed to track each other closely, but clearly things are amiss.  Muni bonds are supposed to be “safe”, not lose 8% in just over a month, especially when the broader market is telling us things are improving.

"You're Going...The WRONG WAY!!!"

The Final Straw

I saw muni bonds have jumped the shark, or shall I say, it’s going to become the bandwagon play, because today Meredith Whitney was on CNBC AGAIN touting her theory of massive municipality collapses, but it gets better.  JPMorgan came out today and said Game Over (Jamie Dimon Warns on Munis).  When enough (seemingly) smart business leaders and CEOs start calling fire, there’s probably something smoldering.  I don’t think it’s a question of whether we’re going to see more muni collapses, but rather, just how long the can will be kicked down the road.  I’m not giving investment advice – I’m just saying be careful.  Many muni funds, especially high yield muni funds (which I no longer own), are “high yield” because they own lots of California, Illinois, Nevada and Florida debt.  Bad.  Some people cherry pick safer individual muni bonds themselves (with low yields).  Novice retail investors often seek diversification through ETFs, ETNs and closed-end funds.  Just be careful if you’re considering jumping in now since yields will start to look more attractive and funds will seem to be a “value”; it may very well be catching a falling knife.

{ 4 comments… read them below or add one }

krantcents January 13, 2011 at 9:43 pm

I was under the impression that all bonds were going down for various reasons never mind credit worthiness.


Darwin January 15, 2011 at 2:48 pm

Munis are getting a spike in bad press of late, which is driving the selloff. Historically, they’d been quite safe; barely an premium over US Treasuries after factoring in tax free status. now, they’ dropping even more than Treasuries.


101 Centavos January 15, 2011 at 12:07 am

Darwin, I have very little exposure to bonds, and after reading this, I may have even less. Cities, counties, and states are feeling the pinch, but instead of doing the needful and making massive cuts, they’re going the other direction. Our city has joined the odious trend of charging motorists who are involved in auto accidents for the “expense” of the paramedics.


Darwin January 15, 2011 at 2:50 pm

Yeah, this is just the beginning for states and towns to start coming up with “innovative” ways to raise revenues. At the end of the day, it’s a tax – and taxes are going up everywhere – stealth or not. Of course, they wouldn’t dare cut entitlements to existing members – not politically popular. Just subtly raise taxes and kick the can down the road.


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