Tags: Muni | Bonds | Plunge

Experts: Muni Bonds May Be Headed for Plunge

By    |   Friday, 30 Apr 2010 09:00 AM

Municipal bonds have constituted one of the hottest sectors of the credit market during the past year, with the Merrill Lynch long-term muni index rising 15.3 percent.

But many experts say a rout may soon be at hand, because investors have been overzealous in their purchases and state and municipal finances are falling apart.

"Too much money has stampeded in," Marilyn Cohen of bond manager Envision Capital told The Wall Street Journal.

Investors have allocated a whopping $13 billion-plus to muni bond mutual funds and exchange-traded funds (ETFs) so far this year, almost twice what they have devoted to domestic equity funds and ETFs, according to Lipper FMI.

All that buying pushed muni yields down to about 85 percent of Treasury yields — approximately the historical average spread between the two.

And with states like New York and California running billions of dollars of red ink, the specter of default looms.

"Historically there have been far fewer muni defaults, and much higher recovery rates than with corporates," John Petersen, a municipal finance specialist at George Mason University, told The Journal.

But with state and local governments in their worst financial crisis in more than 70 years, there will be more defaults, he says.

Still, investors haven’t blinked yet.

“There’s a limited amount of tax-exempts (muni bonds) out there and strong demand,” Gary Pollack, head of bond trading at Deutsche Bank’s private wealth management unit, told Bloomberg.

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Municipal bonds have constituted one of the hottest sectors of the credit market during the past year, with the Merrill Lynch long-term muni index rising 15.3 percent. But many experts say a rout may soon be at hand, because investors have been overzealous in their...
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2010-00-30
Friday, 30 Apr 2010 09:00 AM
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