Trouble in the Muni Market?

1 – A must-read for investors in municipal bonds from welling@weeden: Dark Vision – The Coming Collapse of the Municipal Bond Market.

Today, no matter what one’s reason for municipal bonds, these are speculative investments.

Read it all here. You may remember that Kate Welling was one of only a few bearish voices back in ’99 right before the tech bubble burst. Hat tip to Zero Hedge.

2 – Here are more signs of stress in the muni market.

3 – Houston is already bankrupt.

4 – And here’s what Warren Buffett said about muni bond insurance in his shareholder letter this year, which I highlighted in my February letter to investors.

When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop ‘solutions’ less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents. Losses in the tax-exempt arena, when they come, are also likely to be highly correlated among issuers. If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow. What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far-away bond insurer?

If even just a few communities default on their insured debt, many others would likely be downgraded or cut off from the capital markets altogether – whether they risk default or not. Perversely, even healthy municipalities could be left with little choice but to default.

Consider yourself warned.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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