About the time the world was supposed to end, the municipal bond market was supposed to collapse. At least those were the predictions of some self-styled soothsayers, whose prognostications have pervaded the media.
Despite the vehemence of their proponents, however, both theories turned out to be bunk. Now that the world has survived and the muni market has strengthened, the backpedaling has begun.
“I never said that there would be hundreds of billions of defaults. It was never a precise estimate over a specific period of time,” Meredith Whitney said recently, according to Bloomberg.
Bloomberg took the bank analyst to task over her forecast last December of massive municipal bond defaults, and her apparently faulty memory now. In fact, as Bloomberg pointed out, her infamous predictions made while being interviewed on “60 Minutes” were precise and did cover a specific period of time.
At least the radio broadcaster who envisioned world destruction didn’t attempt a post mortem.
Muni market rebounds
The story behind the muni market rebound is simple.
Investors have added money to municipal funds for the first time since November, ending a 26-week streak of net outflows that began last year. According to The Wall Street Journal, municipal bond mutual funds took in a net $38 million in new cash from investors.
This comes on the heels of six consecutive weeks of rising bond values. In fact, muni prices have risen to levels not seen since last fall, with investors favoring individual bonds, to better control their holdings at a time of heightened credit risk, the Financial Times reported.
As we have maintained (“A Funny Thing Happened While the Pundits Were Screaming“), the selloff last year was driven primarily by technical factors affecting supply, not an expected apocalypse of the market (or the world). State and local governments are feeling the pinch, but they are also, for the most part, taking concrete steps to address their fiscal challenges.
Successful investors recognize these realities and are acting accordingly. They are doing their homework, fulfilling their goal of generating a steady stream of tax-free income and ignoring the fanciful predictions of publicity hungry prognosticators.
To the delight of bond investors, despite the rising prices in the muni market, exceptional tax-equivalent yields are still available on high-quality municipal bonds.