Municipal Bond Forum
The futility of guessing
Q
I enjoyed your article, “Time Flew, But Interest Rates Didn’t.” We have a lot of money in muni bonds and certain inescapable basics keep coming back to me: Higher return is commensurate with greater risk. In this economy, we can’t get more than 1.5% on $1 million in cash, yet our munis continue to pay. I wonder, with state governments in tough shape, Fed money probably dried up and tax revenues down, is there a colossal muni default lurking? That’s what inhibits me, not interest rates, which, as they rise, signals the market’s acknowledgement of greater risk.
A
James A. Klotz responds:
Unfortunately, we won’t venture to guess what is lurking in the wings, any more than we are willing to predict the direction of interest rates.
We can, however, tell you that the number of defaults this year is well below those in prior years. At the same time, states and local governments are making great strides in reducing their debt and protecting bondholders.
Our Chief Municipal Credit Analyst, Dr. Jay Abrams, will soon post a more in-depth look at this credit quality issue.
Start here.
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