Why Is the Smart Money Dumping Municipal Bonds?

December/09/2010 16:31PM
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Billions are flooding out of municipal bonds in the last few weeks. What does the smart money know that we don’t know?

Not being a smart money guy, I can only speculate. My guess is they know the cities that issue the bonds are in trouble. A friend tells me the Lansing(MI) school district is $11 million short on budget for next year? Where do they come up with the money? The Feds have gone on record that they are done bailing out states and cities. No help there. They can’t raise property taxes or they will be run out of town as real estate value keep dropping and appraised evaluations drop with them. They can’t borrow the money, the state is broke too. The only option is to cut expenses.

The money boys expect cities to start defaulting on munis. They see a domino effect. One goes, then more go and so on. Plus they see cities will need to raise interest rates on munis to raise money. That makes the present bonds harder to sell. Rates are already going up on treasury bills.

The burden of pensions that are underfunded for public municipal workers, lower revenues coming in ,and no help from the state or federal government is too much. Cities are bad risks. Bonds issued by cities are bad risks. The big boys who study this and project into the future are predicting bad times ahead for cities. They are getting out of municipal bonds while they still have value.

This is just simple math. When you can no longer lay off teachers, firemen, policemen, and public workers and still can’t pay the interest on your debt, you are broke.

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