Tags: Munis | govt | trouble | debt

Money Magazine: Muni Buyers, Beware of Trouble Ahead

Sunday, 30 Sep 2012 02:57 PM

By Michael Kling

  Comment  |
   Contact Us  |
|  A   A  
  Copy Shortlink
Municipal-bond buyers should beware of more local governments having trouble repaying their debts.

Three cities in California — San Bernardino, Stockton and Mammoth Lakes — filed for bankruptcy this summer, and rating agencies warn that investors should expect more trouble ahead.

"We expect local governments to be struggling with this through 2013," says Robert Kurtter, managing director of public finance at Moody's Investors Service, according to Money Magazine.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

Local and state governments have been financially stressed from the recession and housing downturn, which has reduced their tax revenue, especially property taxes. Just this summer, three California cities filed for bankruptcy. Plus, talk of limiting tax deductions for muni buyers in an attempt to reduce the federal deficit is circulating.

With Treasury yields at rock-bottom levels, investors have piled into munis in an effort to chase yield. But they've scooped up risky, higher-yield bonds along with higher-quality munis, not always distinguishing between the two, Money Magazine reports.

In the process, investors have pushed down average yields to 5.9 percent from 7 percent a year ago.

"The bull market in munis has lifted all boats, no matter if it's a dinghy or a cruiser," Marilyn Cohen, president of Envision Capital, tells Money Magazine.

Some strategies for investing in munis, according to Money Magazine, include: sticking to safer munis with AA or higher ratings and dumping low-quality ones since they don't offer appreciably greater yields; avoiding 30-year munis because the extra return is probably not worth locking up your money for long terms and choosing intermediate terms between seven and 15 years; opting for general-obligation bonds, which are backed by taxing power, or bonds backed by essential-service revenue like water and sewer services.

And if you own munis, keep close tabs on the local governments' finances.

Munis are showing signs of stress, with cities and counties declaring bankruptcy and financial emergencies, writes Gregory Wallance, a partner at Kaye Scholer law firm, for Forbes.

The market depends on investor confidence, and that should not be taken for granted, Wallance warns.

Warren Buffett's Berkshire Hathaway reportedly terminated credit default swaps that insured $8.25 billion of municipal bonds.

"When the shrewdest investor in America pulls back from a major market, attention must be paid," Wallance writes.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

© 2014 Moneynews. All rights reserved.

  Comment  |
   Contact Us  |
  Copy Shortlink
Around the Web
Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
Zip Code:
Privacy: We never share your email.
Hot Topics
Follow Newsmax
Like us
on Facebook
Follow us
on Twitter
Add us
on Google Plus
Around the Web
Top Stories
You May Also Like

Apple Issues Security Warning for ICloud

Tuesday, 21 Oct 2014 20:42 PM

Apple has posted a new security warning for users of its iCloud online storage service amid reports of a concerted effor . . .

MarketWatch's Hoak: Five Real Estate Traps for Retirees to Avoid

Tuesday, 21 Oct 2014 19:58 PM

MarketWatch personal finance editor Amy Hoak cites five common real-estate errors committed by retirees. . . .

Watchdog: Fed Botched Scrutiny of JPMorgan's 'London Whale' Fiasco

Tuesday, 21 Oct 2014 17:49 PM

The Federal Reserve Bank of New York botched oversight of the JPMorgan Chase office that suffered $6.2 billion in tradin . . .

Most Commented

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

America's News Page
©  Newsmax Media, Inc.
All Rights Reserved