How Safe Are Municipal Bonds?

by Annette Thau

How Safe Are Municipal Bonds? Splash image

Between November 2010 and the end of January 2011, municipal bond funds declined by an average of about 6%, although some declined by as much as 11%.

Declines in the price of municipal bonds (“munis”) are nothing new. Two significant declines occurred in 2008: the first in February 2008, and the second a virtual meltdown that took place as the financial panic of 2008 unfolded. Both declines were discussed in articles I wrote for the AAII Journal [past articles are available at]. But one aspect of the most recent decline that distinguishes it from prior episodes is that it is generating heated and controversial discussions in the financial press and media. This is new. Unfortunately, much of this discussion is not well informed.

Much of the current discussion starts with a forecast made by Meredith Whitney, a highly regarded bank analyst, last December on “60 Minutes.” During that broadcast Whitney predicted that massive defaults were likely to occur in the municipal bond market. More specifically, she predicted 50 to 100 “sizeable defaults” generating “hundreds of billions of dollars” of losses. By now, that forecast has been repeated endlessly. Those who feel her forecast is justified cite two potential problem areas: first, general stress on the finances of issuers of municipal bonds such as states, counties and cities due to the continuing economic downturn; and, second, future problems due to significant unfunded liabilities for pension funds and the costs of healthcare to retirees.

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D. from Maryland posted over 3 years ago:

I believe that it has been proven that dollar cost averaging is always an inferior strategy, unless you have a clear crystal ball.

What is the analytica basis for your contrary advice?

Robert from California posted over 2 years ago:

I want to call your attention to my new book, just released in print and electronic editions, The Bloomberg Visual Guide to Municipal Bonds. The book explains in plain English (approx. 200 pages) why traditional municipal securities are safe, and where there are risks for which greater rewards should be expected. It is a direct response to the misleading information that has permeated the press in the past year.

Among other things, the book discusses the diversity and complexity of municipal securities, differences in municipal securities structures, and why some (e.g., GO bonds, water and sewer revenue bonds) are safer than others (e.g., general fund securities) and still others (e.g., nursing home bonds, land-based bonds). It also discusses secondary market considerations, when investors trade.

The book has significant contributions from Jim Spiotto, John Petersen, Mike Bartolotta, Tim Schaefer, Matt Fabian and other market participants.

You can find information on the book if you Google the name without “The.” It is available at,, Barnes & Noble, and other outlets.

The book is well-illustrated by John Wiley & Sons, with substantial data provided by Bloomberg. It is in four-color throughout, with many illustrations, Tips for Investors, Definitions, Key Points, references to resources, discussion of EMMA, and other features. The electronic edition adds videos, tests for investors, mouse rollovers, active web links, pop-ups and other features that make the book a unique and highly professional product that is easy to use and understand.

Robert Doty

Ed Thompson from Illinois posted about 1 year ago:

Wondering why Merideth Whitney has most bond experts in the palms of her hands? Of course, at some time the price of muni bonds, and muni funds, will take a hit and it may be sooner than expected. Then, again, it might not. Meanwhile, my new book, "Bond Interest Rates Will Rise" is nearing completion and should easily become a best seller. Shangri-La, here I come!

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