Wednesday, December 26, 2007
Tax Free Bonds : Crisis Brewing ?
I have three issues with tax free Muni bonds at this juncture
1) Many of the Insurers also have insured Mortgage backed securities; the decline of issues may force a lowering of credit rating for the Muni insures and there for negatively impact the Muni Bonds they have insured.
2) Many Hedge funds buy Munis to barrow against, a decline in the credit quality may lead to a decline in collateral and there some hedge funds to sell other equities.
3) On and un related note several state including New Jersey and California are facing some major fiscal issues which could further pressure Muni prices .
I don’t want to come off as an alarmist its not my style but in general Muni investors are the most risk adverse investors and we have already had significant price erosion in many bonds.
So I am suggest for some customers to look at the old stand buy Utilities for income.