Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What the Detroit Bankruptcy Means for Municipal Bonds

Interest-Rates / US Bonds Jul 23, 2013 - 12:22 PM GMT

By: Money_Morning

Interest-Rates

David Zeiler writes: You can't blame investors in municipal bonds for being worried about how the Detroit bankruptcy will affect the muni market - it's by a factor of four the largest municipal bankruptcy in U.S. history.

Last Thursday Detroit filed for Chapter 9 bankruptcy to seek relief for $18 billion in debt obligations, a debt driven primarily by years of soaring public pension obligations and shrinking tax revenue.


In the city's bankruptcy filing, Detroit emergency manager Kevyn Orr proposed cutting some of those retirement benefits and giving the city's municipal bondholders a haircut that could leave them with pennies on the dollar.

That prospect not only spooked investors in Detroit's municipal bonds, but triggered concern that other municipalities might soon decide to do the same thing.

Municipal bonds as an investment have already come under pressure this year. June was the fourth month in a row of negative net outflows. Over that time, $20 billion has exited the muni bond market.

"I think this will definitely help add to the stampede out of muni bonds," Theodore Feight, owner of Creative Financial Design, told Investment News.

What Should Investors Do About Municipal Bonds Now?

No doubt, the Detroit bankruptcy will scare some investors out of the municipal bond market completely. But as is usually the case with a herd mentality, that probably is not the best move.

For one thing, few municipalities are anywhere near as bad off as Detroit.

"We view Detroit's default and subsequent bankruptcy filing as idiosyncratic, and not as a symptom of a wider issue in the municipal market," Jane Hudson Ridley, a credit analyst with Standard & Poor's, said in a July 19 statement. "Although we have seen isolated pockets of distress across the country, we do not view bankruptcy filings or defaults as a trend."

If anything, the Detroit bankruptcy is a reminder that all investments carry risk, and that you can get burned even in relatively safe sectors like municipal bonds. Most general obligation municipal bonds are secured by a pledge to raise taxes ad infinitum to cover interest and repayments, making them appear very safe.

"Investors have viewed munis as a close corollary to Treasury securities," Warren Pierson, a portfolio manager of the $1.1 Baird Intermediate Municipal Bond Fund, told Forbes. "I think the market has been lulled into lending money to credits that are not as good as they appear."

Investors in municipal bonds also need to keep in mind that it takes most municipalities a long period of time to get into severe debt trouble. The trap is that as their financial picture deteriorates the interest rate they pay goes up - making them increasingly attractive investments.

Other U.S. cities currently teetering on the brink of bankruptcy include Chicago, Cincinnati and Camden, NJ, among dozens of others.

How the Detroit Bankruptcy Has Created an Opportunity

But if the herd does take the bait and starts to bail out of the municipal bond market even faster than it has over the past four months, that presents savvy muni investors with a golden opportunity.

Money Morning Chief Investment Strategist Keith Fitz-Gerald noted that events like the Detroit bankruptcy are frequently an "emotional point of conflict or peril" that create bearish moments in a market.

"That suggests to me that we are at one of those points where buying is more favorable than selling," he said.

At the same time, Fitz-Gerald warned that Detroit's habits are ingrained enough in American society that "it will not be the last" to default.

In other words, when it comes to municipal bonds, buyer beware.

Fitz-Gerald nevertheless advises investors not to give up on municipal bonds.

"If you're using munis as an intelligent part of a portfolio and looking for the income they provide, many munis have been beaten down to the point that they're way under their net asset value," he said.

Back in 2010 Meredith Whitney predicted defaults on muni bonds like the Detroit bankruptcy were coming. Here's what she has to say now about the municipal bond market.

Source :http://moneymorning.com/2013/07/23/what-the-detroit-bankruptcy-means-for-municipal-bonds/#.Ue6QuG0rGCQ

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules