Has the reckoning arrived for municipal bonds? That is the question investors are asking after munis — those old faithfuls of investing — took their biggest hit since the financial collapse of 2008.
Concern over the increasingly strained finances of states and cities and a growing backlog of new bonds for sale overwhelmed the market last week. After performing so well for so long, munis and funds that invest in them fell hard. One big muni fund, the Pimco Municipal Income Fund II, for instance, lost 7.5 percent. The fund is still up 6.75 percent so far this year.
While the declines were relatively small given the remarkable gains in these bonds over the last two years, the slump was swift enough to leave investors wondering if this was a brief setback or the start of something worse. For months, some on Wall Street have warned that indebted states and cities might face a crisis akin to the one that brought Greece to its knees.
“I think it’s too early to say that it’s more than a correction,” said Richard A. Ciccarone, the chief research officer of McDonnell Investment Management.“The facts just don’t support a serious conclusion that the whole market’s going downhill,” he said. “They could. We’ve got some serious liabilities out there.”
Historically speaking Munis were safe and boring providing a safe haven for investors. Today so many cities and states are in such dire fiscal shape that bankruptcy is an actual possibility. Take California, next years debt is expected at 25 billion and with no more bailout money coming where in Gods name are they going to come up with the money. Tax increases will be squeezing water from a stone and the Democrat machine that propelled Brown to victory will not countenance serious cuts. Of course there are the other basket cases such as Jefferson county where corruption led them to the cusp of bankruptcy last year and is struggling to get by.
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