Municipal bond market in deep trouble
Without any fanfare at all, it appears that Municiple Bonds -- an investment that many middle class Americans hold in mutual funds -- are fast becoming a risky investment.
Attractive because of their safety and tax free earnings, Moody's has issued a report that reveals that many of the bonds issued by many states and localities have been downgraded over the last few months because of questions about whether they will be redeemed by cash strapped governments.
Moody's Credit Rating Service just announced the ominous trend that credit quality in the municipal bond market is falling at the fastest rate since the collapse of Lehman Brothers in 2008. Data released showed that 5.3 times as many municipal bonds were credit downgraded over the three last months than were upgraded. Moody's emphasized that: "Downgrades dominated rating revisions across all public finance sectors except for healthcare," said Assistant Vice President-Analyst Dan Steed, author of the report. "A rapid deterioration in credit metrics led to a higher-than-average 14 multi-notch downgrades." Often sold to individuals as "conservative investments with tax free income", munis in states like California, Illinois, New Jersey, and Pennsylvania are increasingly looking like high risk rolls of the dice.
This credit implosion comes after a sustained period when muni bonds were performing much better than corporate bonds. During the credit crisis; corporate bonds prices dropped by 30%, while muni bonds suffered very modest losses. The main reason for this stability was bail-out money showered on state and local governments by the Obama Administration. But fed money has dried up and property reassessments are falling for the first time since the 1970s. Strains on core operating expenses and revenue sources will likely persist, according to Moody's: "This will be mostly due to economic stagnation, high unemployment, declining home values, and low consumer confidence," said Steed. "We expect downgrades to continue exceeding upgrades in upcoming quarters." This is polite ratings speak for: "duck and cover".
The state revenues fell by $14.3 billion, even as the national economy has seemed to stabilize. The quarter ending September 30th saw 163 ratings reductions, the second highest 90 total in history. Over 100 of those downgrades were cities and school districts where falling property-tax collection is playing catch-up on the downside to the 30% fall in real estate values.
Duck and cover, perhaps but it's not panic time yet. If you have invested in a Muni mutual fund, chances are the fund manager has kept a close eye on these downgrades and switched out the riskiest bonds for others that are more stable. Still, it wouldn't hurt to take a look yourself to make sure.
If you have some individual munis lying around somewhere gathering dust, find them and check the latest rating on them. You can assess the risk and decide whether they're worth holding onto.