Tags: municipal | bonds | collapse

Analyst: Municipal Bonds Could Collapse

By Julie Crawshaw   |   Monday, 09 Nov 2009 09:43 AM

In the mid-1990s, states and cities were retiring as much debt as they were incurring.

Today, it’s a different story, according to Frederick J. Sheehan, former director of asset allocation for John Hancock Financial Services.

“The municipal bond market will probably repeat the pattern of the sub-prime collapse,” Sheehan writes for research journal Welling and Weeden.

“Although it is plain to see, the usual experts do not notice.”

Municipalities were spending more than their income before the revenue boom, Sheehan notes, and have largely failed to reduce the debt they incurred.

Now, municipal budgets are caught between sinking revenues from tax collections and state and federal aid and rising coupon interest on bond obligations, one of the largest municipal expenditures.

An example: Annual payments for a bond that paid 5 percent interest rose from about $50 billion to $75 billion between 2003 and 2007.

During the 2000s, Sheehan points out, municipalities borrowed about $150 billion per year in aggregate, peaking at $215 billion in 2007 by which time $2.7 trillion in debt was outstanding, more than two years' worth of tax receipts.

After double-digit losses in 2008, prices of these tax-exempt investments have climbed along with other bond sectors this year.

Muni-bond mutual funds rose 14.4 percent on average through October 29, according to fund tracker Lipper Inc., Market Watch reports.

Meanwhile, muni yields, which move opposite to price, haven't seen such low levels in more than four decades.

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In the mid-1990s, states and cities were retiring as much debt as they were incurring.Today, it’s a different story, according to Frederick J. Sheehan, former director of asset allocation for John Hancock Financial Services.“The municipal bond market will probably repeat...
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