Money Morning Contributing Editor Martin Hutchinson created quite a buzz with a recent column that told investors to steer clear of municipal bonds, the popular fixed-income securities more commonly referred to as "munis."
The story - part of Money Morning's "Outlook 2011" annual economic forecast series - also generated several reader questions. We thought that our subscribers might find them of interest, and are sharing Hutchinson's answers with you.
Reader Question No. 1: Do not companies such as American International Group Inc. (NYSE: AIG) and Assured Guaranty Ltd. (NYSE: AGO) have exposure to a "muni meltdown?" Their stock price seems to say: "All is well and the future is bright"
Martin Hutchinson (A): AGO certainly has an exposure to a muni meltdown; guaranteeing muni debt was a major part of its business. And by and large, the munis that sought guarantees were those whose finances were already not in the best shape.
With AIG, I'm less sure. There are so many other things going on there - the group was so diversified in the first place, and so much has been spun off after the rescue - that I don't think a muni bankruptcy is higher than fifth or sixth on the list of worries for this one.
Reader Question No. 2: Sit Investment Associates Inc. has a Minnesota tax-free bond fund. Are funds with multiple bonds a better bet for investment?
Hutchinson (A): If the bonds are multiple of the same obligor, you're not diversifying significantly. Thus, even though I'm soon to become a resident of New York State, I shan't be putting money into New York muni-bond funds - no matter how favorable their tax treatment might be.
In Minnesota's case, it's a different story. That state has been carefully run and is not on anyone's list of incipient disasters. I think a Minnesota bond fund is probably fine. It offers no extra protection to a direct Minnesota bond. But, of course, diversifying maturities and maybe taking general obligation (GO) and revenue bonds maymake it a better-balanced bond profile for an individual investor.
News and Related Story Links:
- Money Morning "Outlook 2011" Economic Forecast Series Installment:
Municipal Bond Forecast: Deadbeat States Emerge as Biggest Threat to Muni-Bond Investors. - Money Morning News Archive:
"Outlook 2011" Economic Forecast Series. - Investopedia:
General Obligation Bonds. - Investopedia:
Revenue Bond.