InformedTrades

Municipal Bond Bubble

It is not just New Jersey going nuts, California clearly did as well, and cities like New York are in deep trouble.

The city of Vallejo, California fired a huge warning shot by declaring bankruptcy. However, that warning shot has largely been ignored.

Given there is no realistic way for this debt to be paid back, municipal bonds are in a bubble.

People are chasing municipals because of tax exempt status but they are not compensated for for the risk. Please consider the following table courtesy of Investing Bonds



Assuming a 28% tax bracket, the effective yield on a 4% yield muni is 5.56. 20 year treasuries are yielding about 4%. A lousy 1.5% is all you get for the additional risk that a municipal bond blows up. I hardly see how it can possibly be worth it....

...I expect several counties in Florida to default. Major cities like Houston are a distinct possibility as well. Please see City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General) for details.

When counties and counties start declaring bankruptcy, municipal bond yields are going to soar across the board.

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