Are Municipal Bonds Cracking?

Look at last week's price action in PIMCO's Municipal Income Fund ETF (PML).  Municipal bond markets plunged.  Not surprisingly, the California ETF (PCK) shows the most precipitous drop.

It might be argued that muni markets are merely reflecting similar declines in treasuries (TLT).  Fair enough. Bond holders, though, are probably are more interested in the fact that their bonds have declined rather than why they are declining.

Warren Buffet warned back in June on the Muni Bond market. Defalt, so far, have been rare but local and State municipalities are struggling to meet their obligations.

There was a time -- before the 2008 crash -- when triple AAA rated, insured munis were seen as the safest of safe investments.  Times have changed.  Only Assured Guarantee (AGO) still insures municipals but the company has been recently downgraded from AAA to AA.  Ambac (AMBK) is  in bankruptcy. MBIA (MBI) is entangled in litigation and no longer writes new policies.  The financial guarantee business today is but a shadow of its past.

Even though defaults in the muni markets have been rare so far the Feds zero interest rate policy has thrown a cloud of uncertainty over all bond markets.  Declining tax revenues, rating downgrades, loss of insurance, rumors of bailouts, all contribute to uncertainity and suspicion that all is not as well as claimed.

It may be wise lighten up on all medium to long term bonds at this juncture.  Greece, Ireland and Portugal may not be as far removed from New York, Illinois, and California as we might wish.