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Municipal Bond Market Activity

By on February 18, 2011
Categories: FINANCIAL PLANNING, MARKET NEWS

Recent municipal bond market volatility has raised questions about the risks and rewards of investing in municipal bonds.  Rising Treasury yields have weighed heavily on municipal bond prices.  Negative press has helped lead to lower demand and higher redemptions in municipal bond funds.   The media tend to focus on the most dramatic stories, such as the state budget troubles in California and local government mishaps (declaration of bankruptcy by the city of Vallejo, CA).   The alarming headlines do not reflect the fact that the municipal bond market is massive, encompassing thousands of issuers, and that not all municipal bonds are created equal.  California general obligation (GO) bonds are secured by the full-faith-and-credit of the state, including full taxing authority.  Under the state constitution, GO debt service comes before all other expenditures, except state-funded K-12 education.   Despite its troubles, California is collecting more than enough cash to cover the constitutional mandates for education and debt service.  Even though California’s budget situation is bound to result in drastic spending cuts, and likely increased taxes and fees, we believe that existing municipal bond holders will experience the timely payment of interest and principal owed to them.  We are not alone in our confidence.  Savvy institutional investors, such as Pacific Investment Management Company (PIMCO), manager of the world’s largest bond fund, have begun to step up purchases of California municipal bonds in the wake of the recent retail sell-off.  The following link has more information:

http://www.bloomberg.com/news/2011-02-18/pimco-favors-california-muni-bonds-on-rebounding-tax-revenue.html

Dowling & Yahnke, LLC is an independent financial advisor.  The primary goal of our fixed income allocations is preservation of capital, with a secondary goal of income generation.   Our municipal bond portfolios emphasize short to intermediate-term, general obligation bonds, thereby mitigating interest rate risk as well as credit risk.

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