Investment News recently had two items on the coming crisis in the municipal bond market. On December 29, the publication linked to a Kudlow Report video of a conversation between Peter Schiff and Donald Luskin. On January 2, IN published an article based on comments made by Josh Gonze, manager of the Thornburg Limited Term Municipal Bond Fund (LTMIX).
Color me firmly in the Don Luskin camp. There will be an uptick in defaults, likely significant. The federal government is is not likely to bail out the issuers. Investors will experience losses in those issues that do default.
On the other hand, most issues will not default. Those that do will provide some payoff to investors. And right now, muni bonds are priced with higher yields than Treasuries across the yield curve. This suggests opportunity.
The recommendation is to address the credit risk in two ways: very broad diversification through index investing and selection through investment only in AAA rated bonds. In both cases, professional market participants are monitoring the bonds to ensure that expectations continue to be met. -- reflecting bond market conditions in the case of the index, a very high probability of meeting contractual obligations in terms of the credit raters. This would appear to be a very efficient way to implement the bond portion of a diversified portfolio, especially in a taxable account.
Welcome to the blogosphere. Peter Schiff is an idiot. He is always wrong. He guessed the credit crisis, but his clients still got creamed in 2008.
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