Municipal Bonds

Article Index

How Obamacare Will Gut Muni Bonds (Especially in These 7 States)


Obamacare has been an economic and political nightmare.

It's inflicted enormous damage on the American economy and tens of millions of Americans whose medical care has been turned upside down in the name of providing another entitlement without asking anything in return of the recipients.

It's increased medical costs, deprived Americans of their chosen physicians and treatments, and contributed to a culture of dependency that has no place in a land of liberty.

And now, in 2016, it's about to gut municipal bonds.

Investing in Mutual Funds: The Best Pick to Protect from Interest Rate Volatility

investing in mutual funds

Right now investors should be investing in mutual funds that provide stability - not ones that chase yield.

A case can be made for the Fed doves who want to see rates stay low for a while, or the Fed hawks who want rate hikes now.

The bottom line: no one knows when rates are going up. And here's how to avoid the uncertainty and interest rate volatility...

This Could Shake Muni Bonds to the Core

Editor’s Note: Detroit is more than a sideshow. What’s at stake here is bigger than most investors realize. It could take a Supreme Court decision to determine the viability of many municipal bonds. Regardless of whether you’re a muni bond investor or not, what happens in Detroit will affect you. Shah Gilani has the whole story.

Detroit went bankrupt, but so what?

Its own decades-long gross political mismanagement, corruption and incompetence pushed the city over the cliff into bankruptcy.

Why should we care?

It could change the way investors look at muni bonds. And not for the better.

The largest Chapter 9 filing in U.S. history will reverberate well beyond this once-bustling city and its creditors.

What’s most threatening to muni bond investors, and in fact all investors, is whether the city’s general obligation bonds are secured or unsecured issues.

General obligation bonds, backed by a city’s ability to levy taxes to pay interest and principal, are thought to be the safest of all munis.
Detroit is putting this to the test. Read how this will affect all investors...

Municipal Bonds: While Others Bail, It Might Be a Good Time to Buy

Everything runs on liquidity. Unless you know something I don't, that dollar bill in your pocket is just as likely to buy a can of Pabst Blue Ribbon today as it was yesterday, and will be tomorrow.

Or you could sell 1,000 lbs. of gold - if you have that lying around - without fear of completely scuttling the global gold market. Your bank has to have cash, liquidity, lying around somewhere in the back if it wants to stay in business.

And in many cases, it's easy to see or verify this liquidity. It helps everyone feel better about doing anything.

But there are markets where this liquidity is kept off the open exchanges, where it can be used to juice up huge deals. Or it can prevent these huge deals from having the impact that they "should" have, keeping the hands of large traders hidden.

These are the sinister-sounding dark pools of liquidity.

Dark liquidity is generated and stored in a variety of ways, most of which are possible due to the huge variety of trading venues, electronic and traditional.

With dark pools, neither the size of the order nor the entity making that order can be known until the order is completed. Rosenberg Securities Inc. estimates that fully 15% - trillions of dollars - of all trades occurring on American exchanges, every day, utilize dark pools.

Not Playing Straight Poker

And the markets, like nearly everything else, operate on the wide availability and transparency of good, reliable information. A poker game gets its lurid thrills from the partial presence of that information, or the possibility that the information could be faulty. You wouldn't want to play with all your cards face-up. You just don't know, and that's why it's fun to play poker.

But the markets, despite some inkling to the contrary, can't function with true optimum efficiency if good information isn't available to the widest possible group of participants.

It's not that a player has to have the information, but it should be available to the player if things are going to work the way they should. One is a vying, gambling game, and the other is a free market. We should be able to tell the difference.

And there are nowadays big incentives and compelling reasons for large traders, for high-frequency traders, to maintain this half-plentiful supply of good information. Why? It's simple. They're making a killing off of arbitraging market inefficiency.

To continue reading, please click here...

Money Morning Exclusive: Meredith Whitney on Muni Bonds and Red State-Blue State Migration

In 2010 Meredith Whitney made an earth shattering statement during a CBS's "60 Minutes" interview that rocked the municipal bond investment world.

"There is not a doubt in my mind that you will see a spate of municipal-bond defaults,"said Meredith Whitney on Dec 19. She continued, "You could see 50 sizable defaults, and 50 to 100 sizeable defaults, more. This will amount to hundreds of billions of dollars' worth of defaults."

The muni bond market fell far short of Whitney's prediction. But many today feel she was merely ahead of her time.

Recently Detroit has defaulted on its muni bonds leaving investors hoping to get 10% return on their original investment, but there are no guarantees.

As Detroit moves closer to bankruptcy California has 10 cities facing the same fate. The cities of Atwater, Azusa, Compton, Fresno, Hercules, Mammoth Lakes, Monrovia, Oakland, San Jose and Vernon are ready to file for bankruptcy following the now bankrupt Stockton's lead.

Money Morning's Shah Gilani recently talked to Whitney in an exclusive interview about her new book, The Fate Of The States:
The new Geography of American Prosperity

She believes that wealth and opportunity are moving away from the coasts and toward the central corridor. The states of California, Florida and Nevada benefited from the housing boom. However instead of budgeting wisely, local governments spent their windfall profits as fast as they came in on pay increases for public employees, pension increases and pay hikes.

When the housing boom ended, the money stream became just a trickle of new capital. The states were left with pensions they couldn't pay and employees they couldn't afford. They were forced to raise taxes for schools and essential public services.

In contrast a much different scenario was developing in the interior states: N. Dakota, Texas, Indiana. These states avoided the housing crisis. Because foreclosure was not a serious problem they found themselves rich in capital with money to offer tax incentives to companies to relocate and retrain new employees.

These central states are also positioned to reap the massive benefits of from the oil and natural gas boom.

To continue reading, please click here...

Why These Municipal Bond Insurers Make Good Investments

Given the unholy mess that is most local government finances, you would think municipal bond insurers are about to be washed away by a tsunami of defaults.

But legendary fund manager Bruce Berkowitz and other savvy investors have bet tens of millions of dollars that this view is wrong.

Companies that insure municipal bonds have been among the best-performing stocks so far this year and that outperformance seems likely to continue.

That's why Berkowitz has made a big bet on muni bond insurer MBIA Inc. (NYSE: MBI).

To continue reading, please click here...

If You're Investing in Bonds, Bill Gross Has a Message For You

If you're investing in bonds, Bill Gross just delivered you a serious warning.

Gross wrote in his February newsletter that the factors that contributed to last month's 1% loss for U.S. Treasuries - the biggest since March 2012 - aren't going away any time soon.

Total debt, which includes corporate, government and household, has expanded from $3 trillion in the 1970s to about $56 trillion today, explained Gross. He said that's left bond yields in the 1% - 2% range, instead of the historic level of 3% - 4%.

Gross said the staggering amount of debt in the United States has created a "credit supernova" that could crush the bond market as the global credit bubble "is running out of energy and time."

"Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic," Gross wrote.

Gross warned that anyone investing in U.S. government bonds should evaluate their exposure.

And he isn't alone. Jim Rogers and Goldman Sachs have both been bearish on bonds.

"I'm short long-term government bonds," Rogers said Feb. 6 on Bloomberg Radio. "I plan to short more. That bull market, that's a bubble."

So what should bond investors who want yield do with their money?

To continue reading, please click here...

Will Fiscal Cliff Trigger Muni Bond Defaults?

Turns out our nation's counties and cities are in much worse financial shape than previously believed - and the impact of the fiscal cliff could drag these municipalities down even lower.

A recent report by the New York Federal Reserve determined that while Moody's Investment Service reported only 71 defaults from 1970 to 2011, there were actually 2,521.

That's because Moody's only reports on the defaults of rated bonds, which are safer for investors. Taking all U.S. muni bond defaults into account, the default rate is actually 4%, not 1%, according to The New York Times.

It's not just Moody's that missed on municipal bond default statistics. The Fed's combined database indicated 2,366 defaults from 1986 to 2011, compared with Standard & Poor's 47 defaults during this same period.

And now the looming fiscal cliff, scheduled to be reached on Jan. 2, 2013, could drive up many more city debt levels to dangerous highs.

If Congress doesn't agree on a solution, $530 billion in tax increases and reductions in federal spending will take place at the start of next year. According to a recent study by the Congressional Budget Office (CBO), going over the fiscal cliff could take the United States -and its cities and counties - back down into the valley of another recession.

That's when muni bond defaults could tick up.

To continue reading, please click here...

Investing in Bonds: How to Build a Bond Ladder

With interest rates at near-record low levels it appears that the only way for rates to go is up.

As the U.S. economy moderately strengthens, that means the bond bubble will begin to leak. Even darker, the bubble might just burst altogether.

The prospect of yet another bursting bubble makes investing in bonds difficult. The same is true for stocks.

After all, stocks tend to underperform when rates head north, while gold will certainly drop back once interest rates begin to rise ahead of inflation (which may take a considerable time.)

However, there is one strategy that enables you to prosper even in this tough environment.

It is called the bond ladder. It works like this...

Bond investing in a rising rate environment can be a terrific way to lose money.

If you buy short-term bonds, the yields may well be less than inflation, causing you to lose money in real terms.

And if you invest in long-term bonds, your immediate yield will generally be higher, but you run a large risk of losing part of your principal as rates rise and bond prices decline.

These losses can be a large multiple of your interest payments.

For example, if 30-year bond yields rise from their current 3.11% to 5.11% over the next year, your principal loss on a 30-year T-bond will be $30 on every $100, far more than the $3.11 you will have received in interest.

Of course, if you hold the bond for the next 29 years you will get your principal back at maturity.

But meanwhile you will have spent 30 years locked into an investment at interest rates below the market, and probably below the level of inflation. Not a wise choice.

Investing in Bonds: Building a Bond Ladder

The problem of investing in bonds then is one of reinvestment. You really don't know at what rate you will be able to reinvest your money when the time comes.

This problem is solved by buying bonds in a range of maturities, from short to long, and reinvesting the proceeds of each investment as it comes due.

For example, you could invest 10% of your money in each Treasury bond maturity from 1 to 10 years.

Then when the first bond came due in year 1, you would reinvest the proceeds in a 10-year bond, so you would again have 10 equal bond investments coming due in years 2 through 11.

Here's a concrete example.

To continue reading, please click here...

Don't Use History To Predict Fate of Municipal Bond Market

Wall Street analyst Meredith Whitney triggered panic in many municipal bond holders when she declared last year that municipal bond defaults - possibly 50 to 100 - were on the horizon, due to the debt-laden condition of state and local government budgets.

Although some financial analysts have criticized Whitney for muni-bond warnings they say are overblown, she's not the only one predicting municipal bond market trouble. JPMorgan Chase & Co (NYSE: JPM) Chief Executive Officer Jamie Dimon said last month he expected more defaults this year, and Money Morning Contributing Editor Shah Gilani said Whitney is not crying wolf, as others have claimed.

"Make no mistake: The so-called ‘deadbeat states' problem is real, and muni-bond defaults are almost certainly unavoidable," said Gilani.

Read More…

Municipal Bond Forecast: Deadbeat States Emerge as Biggest Threat to Muni-Bond Investors

The U.S. municipal bond market could be cruising for a bruising.

The same thing goes for muni-bond investors.

The danger is right out in the open for everyone to see. But investors aren't heeding the warnings.

The bottom line: Avoid the sector, except the very-highest-rated issues; and even then, given the low yields available, there are clearly lower-risk/higher-profit opportunities for your money.

To understand the spiralling dangers muni-bond investors face, please read on...

Question of the Week: Investors Prepare for State and Local Governments' Tight Budgets

It's been 25 years since state and local governments across the United States were in such bad shape - and the budgetary pain is far from over.

The state-funding gap is growing, local governments lost 76,000 jobs last month, and property tax receipts are slated to fall for years.

"While the recession might have officially ended on the national level, cities are in the eye of the storm and the problems are intensifying," Christopher Hoene, a director at the National League of Cities, told The Financial Times.

A study released last week showed that big U.S. cities could face a painful financial squeeze: Their pension plans are under-funded to the tune of $547 billion.

Read More…