Saturday, December 20, 2014 10:48am
North Adams, MA now: 21 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: Will the Municipal Bond Massacre Continue?
By: Bill Schmick On: 02:59PM / Thursday December 30, 2010
Important
0
Interesting
0
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0

There was a time when municipal bonds were a staid but safe investment. Tax conscious investors, widows and orphans would plow money into these debt issues of towns, cities and state municipalities fully expecting price stability and a predicable stream of interest payments. No more.

What makes municipal bonds appealing to many investors is that interest income received by holders of municipal bonds is often exempt from federal income tax and from the income tax of the state in which they are issued. But ever since the financial crisis and the recession that had accompanied it, state and local governments have had a hard time of it and their bonds have reflected that trading in a wide range similar to stocks and other riskier investments. Vast sums have been made and more recently lost in Muni bonds as investors bet on which states and towns would go bust and which would survive. The betting continues unabated.

Over the last two months, the entire $2.8 trillion market has seen a sizable decline in value. In just one day last month, for example, these bonds were hit by more than $3 billion in redemptions. By the end of that week, bond sales totaled $15.4 billion. The average municipal bond fund suffered a 3.7 percent loss for the month. Losses overall are approaching 6 percent for the year which is a modern-day record.

Underneath those headline figures is a market in which investors are feverishly sorting out those state and local governments with strong fundamentals and even stronger prospects and those that don't.

Forty-six states experienced budget shortfalls this year and 39 of them have projected gaps next year totaling $112 billion to $140 billion. Tax revenues this year dropped 3.1 percent, although that's an improvement over 2009's decline of 8.4 percent. However, most states expect property taxes to begin to decline next year. These taxes tend to lag real estate prices by about three years since assessments trail prices. Towns and municipalities rely on these taxes for at least 25 percent of their revenues and they look to the states for at least another third of their budget in state aid.

States have no money to lend, however, because their own taxes continue to decline due to the large number of unemployed, slow economic growth and the inability to raise taxes while residents are struggling to make ends meet. In 2011, states will also have to begin paying back to the federal government the $40.9 billion they borrowed interest-free through the stimulus plan.

In a similar fashion to the debt problems within some countries in Europe (Greece, Ireland, Portugal, Spain and Italy), here in the United States we too have our weaker states with Illinois and Nevada most often rated the states most likely to experience further economic turbulence. As in Europe, those weak sisters must pay substantially more in interest to attract investors to their bonds while states that have a better financial footing benefit by paying less.

In addition to the shaky finances and unknown risk that confronts this market in 2011 we also face the prospect of interest rate risk — the threat of higher interest rates in the government markets (see my column "Why Are Interest Rates Rising?").

Long-dated municipal bond prices and interest rates track long-term Treasury bond. Unfortunately, U.S. Treasury interest rates on the long end have spiked over the last two months and are predicted to move even higher in the New Year. For investors of both U.S. Treasury and municipal bonds that will mean further losses as bond prices decline.

If you must own municipal bonds, then switching from bond investments in weaker states and localities into bonds issued by stronger municipalities seems to me is common-sense tactic to employ right now. Secondly, stick with revenue bonds as opposed to general obligation bonds.

Revenue bonds repay investors from a specific source such as a highway toll rather than from a tax. General Obligation bonds, on the other hand, are secured by a state or local government's pledge to use whatever resources necessary (such as new taxes) to repay the bonds.

At the end of the day, Muni bond bulls argue correctly that if push came to shove the federal government would bail out any state that was on the verge of bankruptcy. In turn, any state would rush to the aid of a municipality within their domain that was on the verge of failure. I don't dispute that. And if it came to pass that something like that were to happen, it might be a buying opportunity to really aggressive traders but not for widows and orphans. For those who depend on these revenue streams to pay the bills, a far better approach is to simply sell the riskier securities and buy those that offer greater security.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



1 Comments
Tags: Treasuries, bonds      
News Headlines
McCann Students Lauded for Leadership & Skill Building
BU Looking For More Use of Tanglewood Campus
Battalion Falls at Danville
Berkshire County Arc Receives Workplace Wellness Grant
Cultural Pittsfield This Week:Dec. 19-Jan. 4
Groundbreaking Ceremony Held at New Williamstown Senior Housing
Shakespeare In the Park Will Resume At Pittsfield Common
Park Street Reconstruction Will Be Completed In Spring
'Exodus: Gods and Kings': And Frogs, Too
Hotel on North Construction Third Complete

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (152)
Independent Investor (208)
Archives:
December 2014 (4)
December 2013 (3)
November 2014 (4)
October 2014 (9)
September 2014 (5)
August 2014 (7)
July 2014 (2)
June 2014 (6)
May 2014 (9)
April 2014 (8)
March 2014 (6)
February 2014 (6)
January 2014 (8)
Tags:
Economy Stocks Jobs Fed Fiscal Cliff Europe Crisis Debt Ceiling Euro Taxes Greece Japan Debt Federal Reserve Housing Energy Recession Europe Oil Bailout Congress Stock Market Currency Retirement Deficit Interest Rates Pullback Markets Banks Rally Selloff Stimulus Commodities Election Metals
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Will the Municipal Bond Massacre Continue?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
The Independent Investor: Election Investors Ignored
@theMarket: It's All About Oil
The Independent Investor: Is Russian Bear Back In His Cave?
The Independent Investor: The Truth Behind Black Friday
The Independent Investor: Is There a Doctor in the House?
The Independent Investor: The Pipeline Made Simple
@theMarket: Markets Are in Half Time
The Independent Investor: U.S. and China Square Off
The Independent Investor: Workers Get to Save More in 2015
@theMarket: All Clear


View All
Girls BB: S Hadley vs Hoosac
Friday night girls BB game final - Hoosac 65 South Hadley...
Girls BB: Mount Greylock vs...
Greylock beats Wahconah 52-46
Hotel on North Construction
Media and local officials got a tour of the under...
Hockey: Wahconah vs Taconic
Andrew Beaudoin scored two goals and added an assist to...
Swimming: St. Joe s vs...
Emma Whitney and Jesse Tobin each won two events to lead...
Boys BB: St. Joe vs Drury
The annual Gene Wein Boys Basketball Holiday Tournament got...
Boys BB: Monument Mountain vs...
The annual Gene Wein Boys Basketball Holiday Tournament got...
Girls BB: St. Joe's vs McCann
McCann Tech girl's win over St. Joe's, Monday night at...
Cheshire Church Christmas...
Cheshire residents walked or traveled by hayride to...
Sen. Downing's Holiday Open...
State Sen. Benjamin B. Downing held his annual holiday open...
Crane Winter Wonderland 2014
Santa's Winter Wonderland at the Crane Mansion.
Boys BB: Chicopee Comp vs...
The Drury boys basketball team recorded its first "W" in...
McCann LPN Graduates 2014
McCann Technical School's Licensed Practical Nursing...
MCLA Honors Adams Scholars
MCLA recognized the achievement of high school seniors who...
Wahconah Falls in State Title...
Wahconah never did get those points in a 43-0 loss in the...
Pittsfield March for Justice
More than 200 Pittsfield and county residents marched on...
Girls BB: S Hadley vs Hoosac
Friday night girls BB game final - Hoosac 65 South Hadley...
Girls BB: Mount Greylock vs...
Greylock beats Wahconah 52-46
Hotel on North Construction
Media and local officials got a tour of the under...
Hockey: Wahconah vs Taconic
Andrew Beaudoin scored two goals and added an assist to...
Swimming: St. Joe s vs...
Emma Whitney and Jesse Tobin each won two events to lead...
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved