In the wake of negative comments made by high profile financial services analyst, Meredith Whitney, municipal bond prices have declined substantially in the last few months. Whitney claimed that there would be “50 to 100 sizeable defaults” by state and local governments in the near future. We have a different view. Historically muni bond defaults have been very rare, averaging less than one-third of one percent vs. corporate bonds at nearly 14 percent in recessionary periods and about 3 percent during expansions. While many states and local governments are currently experiencing budget deficits, these are cyclical in nature for the most part and will resolve once the economy strengthens. Moreover, like California, most states are required by law to prioritize bond interest payments ahead of other spending. A recent article in the New York Times puts the current municipal crisis into historical perspective and outlines the reasons why massive defaults are unlikely.
Should you have any questions or concerns about your municipal bond portfolio or the firm’s approach to fixed income investing, please contact your Dowling & Yahnke investment advisor at (858) 509-9500. We look forward to speaking with you.