Wednesday, November 24, 2010

Muni Bond Crisis, The One Thing You Must Know

Muni bonds are hardly ever talked about. They’re the classic “widows and orphans” investment. They’re issued by states, schools, and other municipalities which have historically rarely defaulted. They pay a steady rate of interest. The interest is usually tax free.

That all changed this week.

In classic it doesn’t matter until it matters groupthink, investors woke up to the disastrous financial quagmires governments at all levels have gotten themselves into. And they ran for the exits.

Municipal bond investors yanked $3 billion out of muni bond funds last week. That was the biggest sell-off since 1992.

The relatively slight selling pressure on the highly illiquid $2.8 trillion muni bond market had a big impact too.

The iShares S&P National Municipal Bond ETF (NYSE:MUB) plummeted:

Are these bond holders headed for a haircut? ... they are far less secure than has been the norm

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