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Q

I have about $200,000 invested in several municipal bonds with Wells Fargo Advisors. On “60 Minutes” Sunday, they said there is a growing problem in the muni market, with several states not being able to fulfill their obligations. A major problem was predicted in this market within the next 12 months. What do you think? Should I divest my holdings?

A

James A. Klotz responds:

It would be inappropriate to offer an opinion regarding your bonds without knowing specifically which issues you hold. In general, if you own quality bonds, purchased for tax-free income, there is absolutely no reason to consider selling them.

It is undeniable that some state and local government’s budgets are being strained, but any talk of “widespread” defaults is, without specifics, overstated and irresponsible. John Carney, of CNBC, points out that Meredith Whitney, who was quoted on “60 Minutes,” predicted that 50 or more municipalities will default next year. But, he said, “experts within the industry can not reconcile her numbers with what they see on the ground,” and that “her numbers need to be defined.”

We agree.

Is she talking about high quality, investment grade munis or unrated bonds? There is a big difference! And, there has always been a dramatic difference historically in their default rates.

Actually, we found the “60 Minutes” piece to be quite positive for investors.

According to Gov. Chris Christie of New Jersey, municipal governments throughout the country will now be forced to confront the difficult issues previously ignored by prior administrations. He predicts there will be no more “kicking the can down the road.”

Bond investors can take comfort in the fact that numerous governors-elect ran in November on platforms calling for “fiscal responsibility.” We expect entitlements and municipal pensions to be reworked in other states as they are in New Jersey. Also, because states and municipalities depend on borrowing for their long-term needs, bonded debt will be the last area considered for potential cost savings.

Although we do not anticipate widespread defaults or disasters in the municipal bond market, we applaud “60 Minutes” for shining a spotlight on these important issues. An enlightened public will help ensure that the necessary difficult decisions are made by our elected officials. This can only be good for bondholders.