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Q

Barron’s painted an alarming picture of municipal bonds.   What are your thoughts?

A

James A. Klotz responds:

Since the onset of the sub-prime crisis and subsequent recession, there seems to be no shortage of journalists anxious to identify the next financial disaster. It makes us wonder why they didn’t warn us about the last one.

It’s always difficult to refute an argument based on a ”sky is falling” premise. The author asks, “what if the stock market falters, the economy does not return to full health, jobs remain scarce and tax revenues remain depressed.” It’s reminiscent of John Maynard Keynes, who said: “ In the long run, we are all dead.”

To his credit, the author suggests such assessments might be alarmist and points out that only one state has defaulted on its general obligation bonds in the past century.

We have expressed our dissatisfaction for years that the financial media has given short shrift to the municipal bond market and has been overly enamored of general obligation debt. From this standpoint, there is some merit to the article.

We have suggested that investors diversify their portfolio and include bonds that are backed by revenue streams generated from essential services which cannot be diverted to other uses. Investors should consider these factors when making municipal bond purchases.

Obviously, these are difficult times for municipal entities as well as the economy in general. We don’t, however, think the apocalypse is upon us and we don’t advise an analysis of your investments as if it were.