The Collapse of the Tax-Free Bond Market

Inquiring minds are reading of the problems in the bond market:

This crisis is no longer just a forecast. It’s happening right now — and it’s accelerating.

And even if you’ve never owned muni bonds in your life, their demise is absolutely notsomething you can ignore. Here’s why …

FIRST and foremost, every state and local
government in the United States is directly
impacted, whether financially weak or strong.

Look at the chart above. That’s the muni bond ETF — the S&P National AMT-Free Municipal Bond Fund (MUB). It holds major bellwether tax-free issues, such as the State of California, the North Texas Thruway Authority, and the Puerto Rico Sale Tax Financing Corporation. Nevertheless, it is suffering one of the worst price crashes in the history of municipal bonds.

Lesser municipal bonds, especially the tens of thousands that are issued by unrated local authorities, are not only sinking more dramatically … they’re almost impossible to sell due to the sheer lack of buyers.

And it doesn’t matter how strong or weak the offering city or state is:

And regardless of ratings, ALL state and local governments are now being forced to pay sharply higher borrowing costs. As the
Wall Street Journal explained late last week …

“With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress. …

“[Last week] A New Jersey agency was forced to cut the size of a bond issue by about 40 percent because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.”

2011 is already shapning up to be a very tough year.

A tip-of-the-hat to Dan for this story.


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