Rising Risks in Muni Bonds Worry Investors

I have been warning about the municipal bond market for over a year. Look for significant defaults in the months to come.-Lou


Rising Risks in Muni Bonds Worry Investors


Municipal bonds have long been a no-brainer investment. But not any more. A growing number of analysts and financial planners are raising doubts about the bonds of local and state governments. They worry that a weakened economy, along with rising cost of benefits for city workers, will make it tougher for local governments to meet their obligations.
"Munis don't offer the same sleep-at-night safety they used to," says Christopher Cordaro, a financial planner at Regent Atlantic in Morristown, NJ. Earlier this year, Cordaro, who has been a planner for 22 years, began advising clients for the first time in his career to trim their muni bond holdings. "Municipalities across the country are in rough shape."

Cordaro isn't the only one having doubts. Last week, ratings agency Moody's lowered its outlook for the debt of local governments to 'Negative.' In its report, the ratings agency said local governments face "unprecedented fiscal challenges," over the next 18 months.

The report also noted that this was the first time Moody's analysts were broadly worried about the ability of local governments to pay back their debts. Among the places Moody's finds to be most troubled are cities in Florida and California, because of the real estate bust, Indiana, Michigan and Ohio, which are being hurt by the drop in manufacturing, and Connecticut, New Jersey and New York, due to the financial crisis.

The debt of municipalities has long been a staple of many investors' portfolios. Financial professionals and their clients have been lured by munis' tax-free status, a history of few defaults and nearly three decades of low single-digit annual returns.


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