Municipal Bonds – An attractive investment opportunity

Description – The article discusses about the current status of the U.S. municipal bond market as the aftermath of the Europe debt crisis.

As the budget gaps have been narrowed, investors have become inclined towards the municipal bonds. The Standard & Poor’s Muni Bond index was up and gained almost 3.85 percent up to now this year.  iShares S&P National AMT-Free Municipal Bond ETF, traded in NYSE as MUB has also given a considerable rise. The investors are happy with this performance and considering muni bonds as a good contributor to their fixed-income portfolio. Apart from the tax-benefits, the bonds offer other benefits that also lure investors to invest in this.

The knocks on the municipal bonds

Although munis look attractive, yet there are some panics involved in it. The budget deficits as well as the doubtful distinction of U.S. municipal bankruptcy are the key pitfalls, when it comes to investing in muni bonds. Some California cities like Stockton and do Vallejo as well as Harrisburg, Pennsylvania have failed on making debt payments and that surely instill hesitations amongst the bond investors. European debt crisis has contributed a lot in knocking the U.S. municipal bond market. While major European countries such as Greece require trillions of dollars as bailout, it is so obvious that the retail bond investors will be askance about U.S. debt facts. For example, the economy of California, which is at least 6 times bigger than the economy of Greece? Defaults in this state will surely cause panic in the municipal market.

California is not Greece

However, California is not Greece. Not only California, no U.S. state is not like Greece. According to the fixed-income analysts, Greece’s economy has hardly any similarity with the economy of any of the U.S. states. No U.S. government borrows money for funding deficits. In fact, no state can borrow funds for fulfilling deficits over multiple financial years without jumping through several political as well as legal loops. Moreover, U.S. states don’t accumulate debts for operational reasons and the debt-service expenses generally don’t cross 3 percent to 5 percent of the total government expenses.

Downside of U.S. economy

The state governments as well as local governments often slash the budgets whenever there is a revenue deficit. They also raise different taxes including income tax. It becomes a sore for the citizens, for examples, the citizens of California who has just faced such turmoil. And for that reason, the financial experts suggest that every state, except Vermont, should have a balanced budget to avoid facing situations like Greece’s. Such balanced budget would help the municipal bonds investors get paid properly.

U.S. economy – As of now

The good thing is that states are generating revenues with better pace as the budget deficiencies decline. According to the Census Bureau, American states witnessed a growth in the tax revenue generation, as of 2011. In this year, the tax collections rose to almost 765 billion USD. But in 2012, 30 out of 50 American states project a shortfall of 54 billion USD which should be reduced. As per the market strategists, the gap between the earned revenue and deficit has started narrowing down. On the other hand, the gap is increasing in Eurozone countries. Apart from Greece, there are many countries, which managed to remain stable during recession, are now on the threshold.

Revenue generation and Municipal Bond market  

With the growth in revenue generation, the muni bond market seems promising to the investors. They keep accumulating profits including tax advantages that ensure that the demand remains strong surpassing the supply.

The state governments as well as the local governments have experienced financial challenges due to the Great Recession and the Europe debt crisis. However, the U.S. states have hardly accumulated excess debt as countries like Greece.

Author’s Bio – Jonny Pean is a financial advisor of His writings on finance, investment, insurance etc lure readers.



June 2012 Municipal Bond and Tax Free Mutual Funds News

municipal bonds

This month saw more of news about financial market volatility. Tax day has come and past. The Month’s municipal bond news included:

  • 6/1/12: Vanguard Municipal-Bond Funds Try to Up Their Game. – Morningstar has new analysis on Vanguards Tax Free Muni Funds. They have good words to say and point to high securities quality without pressure to take extra risk in order to get a little more yield.
  • 6/14/12: Detroit Postpones $596 Million Water, Sewer Muni Bond Deal – Cities a political squabble that might drive Detroit into default.
  • 6/15/12: Muni-Bond Investors Should Thank Europe – Investors from around the world are buying United States Bonds. This has in turn helped drive up the value of Muni Bonds. Thank You World! The finances of many municipalities are better than Europes!
  • 6/25/12: The large US bank ratings downgrade – The biggest banks were recently downgraded by rating agencies. These banks back variable rate demand bonds. This type if municipal debt will probably get downgraded causing the value of it to fall. Watch out if you own any.
  • 6/29/12: Stockton, California declares Chapter 9 Bankrupcy – The biggest city in America to file bankrupcy is now Stockton. Their problems were caused by the forclosure prices and millions spent on civic improvement projects. They have tried to make ends meet by laying off police and other city employees. All payments will be suspended to bond holders.
  • 6/29/12: June and July are the peak months when municipal bonds mature. Approximatly, $90 billion will mature and most will need to be reinvested in new bonds. On average, only $24 billion in bonds gets issued every month. Because there is limited inventory, investors will be fighting against eachother for bonds. Becareful and do a lot of comparison shopping.

May 2012 Municipal Bond and Tax Free Mutual Funds News

municipal bonds

This month saw more of news about financial market volatility. Tax day has come and past. The Month’s municipal bond news included:

  • 5/7/12: Illinois Bonds Draw Big Interest – – Illinois sold a whopping $1.8 billion in Municipal Bond debt last week. It had to price them 1.75% higher than the benchmark rate. S&P had previously warned that it may cut Illinois rating from the present A- due to continued problems. It seems like investors are desperate to get any yield these days.
  • 5/6/12: Bond firms’ campaign gifts linked to sales pacts. – Major companies who were competing for California Bond underwriting donated $1.8 million to school districts and ended up getting hired for a majority of the projects. At least they didn’t take them to strip clubs!
  • 5/16/12: Assured Guaranty is slated for a possible credit rating downgrade to single A from Aa3. If they are downgraded, it may lower demand for their insurance from Municipalities. Individual investors may be less willing to buy Muni Bonds due to bonds not being insured. In 2011, 5.2% of new Municipal  Bond issues had insurance. A fairly small number, investors have understood that they need to do their homework on the bonds quality and not value insurance that much.
  • 5/18/12: Cities are getting more savvy with Municipal Bond buyers. Chicago recently had a luncheon to help assure investors that their working hard to make things right. Other cities following the same tack, appear to have calmed investors and perhaps even lowered interest costs that they had to pay.
  • 5/24/12: Treasuries Losing Appeal With Widest Yield Penalty: Muni Credit – Businessweek. – 10-year tax-exempt muni bond yields rose to 108% of those on Federal debt last week, the highest since Dec. 2. This makes municipal bonds more attractive than Treasuries for most people.
  • 5/30/12: MSRB Launches Online Investor Toolkit – MarketWatch – The MSRB has added some very useful tips for individual investors interested in municipal bonds. They are helping to educate individuals on this very confusing marketplace full of hidden risk and markups.

April 2012 Municipal Bond and Tax Free Mutual Funds News

municipal bonds

This month saw more of news about financial market volatility. Tax day has come and past. The Month’s municipal bond news included:

  • 4/17/12: EMMA – MSRB – Municipal Securities Rulemaking Board – Read the Official Statement of bonds and also use the new  EMMA System Alerts feature to stay up to date on any important disclosures.
  • 4/17/12: Safest Return Imperiled as Kansas Considers Tax Cut: Muni Credit – Bloomberg. Kansas and Oklahoma be affected by the proposals to cut income taxes. Both states have an AA+ rating from S&P.
  • 4/27/12: The Jefferson County legal battle is now moving towards resolving whether County Officials can divert money to fix a leaky sewer system instead of paying debtholders. This case will take years to resolve.
  • 4/27/12: New credit default swaps have been expanded for Municipal Bonds. This is increasing on trading volumes and could inject volatility into the bond market.

March 2012 Municipal Bond and Tax Free Mutual Funds News

municipal bonds

This month saw more of news about financial market volatility. The Month’s municipal bond news included: