Capitalize On The Municipal Bond Market Crisis

Image by: Bart Everson
By Steven Morrison II

Late last year, a crisis hit the municipal bond market, and it was all based on top-down perception. Word got out that mega-investor Warren Buffett had pulled his money out of the munis, so many gleefully followed along, sensing that the Yoda of Wall Street was “something onto.”

Now, a few months later, the municipal bond market is in shambles as speculators and investors are looking to the MB market as the next big economic trouble brewing, like a black cloud ready to dump disaster juice all over the place.

Anne Van Praagh of Moody’s Investors Services spelled it out for Forbes, saying that there is a good possibility that “defaults will increase” as governments get desperate to make the numbers work.

“… Distressed municipalities … will begin to view debt service as a discretionary budget item,” said Van Praagh.

Meaning, municipal bonds could start to see defaults at levels not seen in that market … EVER. Even during The Great Depression, munis were solid performers. But the going wisdom is that they are soon going to be taking a nose dive.

You can take advantage of this mini-crisis hoopla by getting yourself an umbrella, by betting against the municipalities and their abilities to pay up. You take the position that municipal bond defaults will increase to historic levels. They struggle, you win. It rains, you’re dry.

Of course, if you have full faith in those governments to pay up (with help from the feds, perhaps), then there are plenty of big scores to be made on the riskier muni bonds.

Your decision, really, but I think I’ll go with Buffett on this one.