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rcatti

Are Muni Bonds Financial Narcotics ?
There is growing acknowledgment amongst some muni bond analysts that downgrade risk has increased substantially and therefore significant investor risk of mark to market devaluation may occur. Investors should forget about liquidity when their municipal bond issue goes downhill....unless they are prepared to take a big capital loss .....
It is astonishing that muni investors are 'blocked' about downgrade risk. Some think of munis as commodities like U.S. Treasuries, but they are not.. A municipal bond is a loan to a municipality or agency which have about as much liquidity as a commercial loan. This is troubling and the way the muni complex works is no different than any other structured or derivative product: no transparency. I see investors ignoring the significance of rapidly declining municipalities' tax receipts, the Federal intervention of propping municipalities up with new fangled inventions ( Buy America Bonds) ...(Read more of this comment). States like California are on the road to bankruptcy unless they manage a very severe budget, soon. Other states like New are equally in trouble .........no one talks about what is happening financially to New York State and New York City. Without the lucky surplus New York has had, New York would be in 2009 in the same boat as California. Wait until next year for New York fireworks to begin when the surplus is gone. Are muni analysts missing something? In the Corporate bond market, increased default or downgrade expectations are matched with increased borrower cost. Munis will not remain immune to this market phenomena . Check these reports and you will see what is the status of municipalities' ability to pay back investors.

http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-06-18-state_revenue_flash.pdf

and:
http://www.nasbo.org/Publications/PDFs/FSSpring2009.pdf

Read this article from Stateline.org:

http://www.stateline.org/live/details/story?contentId=411650

Munis are high in their own stratosphere right now as a credit product. They should be compared to medium to low investment grade and to even below investment grade loans. The only time they came close to reflecting their true underlying credit reality was in Q4 2008.
So when the Rockefeller Inst. of Govt. says "sales tax in late 2008 was worst in 50 years" no one pays attention. No one should be told that muni rates have gone down because muni credit risk is declining. A shoe is going to drop in the muni market and when it does to it's going to hurt awful..... When the financial press tells people that investors are "gobbling up" munis I say watch out!
Imagine the perfect product, almost the whole world is in financial turmoil and there is this product called municipal bonds that you don't have to pay taxes on, you don't have to worry about default because its negligible, don't fret about liquidity even if your bonds get downgraded because you got a 7-10 % effective yield and that beats DOW and S&P hand over foot. You just make money and don't even bother to look. Muni bonds become the new financial narcotics.(Show less of this comment)