According to an article by Charles Riley for CNN Money they are. Municipal bonds continued to sell off last week with investor worried about state and local government budget shortfalls highlighted by the media in recent weeks. States such as California and Illinois face budget shortfalls of billions of dollars, making the growing fears easy to comprehend. Meredith Whitney, a prominent bank analyst, went on 60 Minutes in front of a nation audience and gave a “doomsday prediction of up to 100 sizable defaults in the muni bond market”; adding to the growing concern that states, along with cities and small countries with default on their municipal bonds.
The increased speculation in the markets have sent yields on 30-year AAA-rated bonds to near 5%, levels that have not been since early 2009. The article reaffirms that the fear in the muni market is a “convincing narrative” but has experts in the field confused about the public’s reaction. According to Burt Mulford, a municipal portfolio manager at Eagle Asset Management, “the attention-grabbing, doomsday headlines are overplaying the picture.”
Even with all of the budget shortfalls “you are rarely going to see a local government default, and if you look at states, there has never been a default,” and if a bond was to default “the recovery rates are very high ? almost 90%” says Milford. Bondholders would recoup close to all of the money owed to them if a default did occur, a luxury not seen in riskier corporate bonds.
Mulford says that he will generally steer clear of the more speculative markets where there is more uncertainly in revenue streams and “sticking with bonds issued by municipalities that are on sound footing will mitigate risks.”
It is difficult to determine how much of the sell off can be directly attributed to the fears of large-scale defaults, but according to John Mousseau, a managing director at Cumberland Advisors, the drop in the muni markets is due “almost 100%” to the media overloading the public with fears of large-scale defaults. These low prices in the municipal bond market has Mousseau investing in them, saying he doesn’t “know how long this opportunity will last, but we are buying.”
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