Muni Bonds: The Most Dangerous Bonds to Own

If an investment product promised safety, potential appreciation, and tax-free income would you bite? Many high-income earners, affluent savers, and, to a lesser degree, mutual fund investors have taken the plunge and turned over almost $4 trillion to state and local municipalities that promise this utopic mix of protection, growth, and tax efficiency. With tax rates rising, who can blame them for buying municipal bonds? So, is this smart investing or is there a hidden danger?

BAD MATH

With the burgeoning debt loads in almost every corner of this great country, could owning muni bonds be fraught with untold risk? Let's examine this question by starting with the basics. Say, I come to you and ask for a loan to fund spending of $120,791 and I have an income of $101,000, would you loan me money? Why not? Because I spend more than I make? Interestingly enough this example is from the bottom line financials from my home state of Ohio (with a few zeros removed of course).

Andrew Zarivny/Shutterstock

ARE DEFAULTS RARE?

With scenarios of overspending found in virtually every state and municipality it's not hard to imagine that defaults will continue into the future. Here's a list of some of the largest defaults from Moody's Investors Service to further illustrate the point of how fragile a muni bond can be:

--$3.47 billion. Jefferson County, Alabama. The county's sewer revenue bonds went into default and the general obligation bonds soon followed.

--$2.25 billion. Washington State. Bonds issued to finance a nuclear power plant defaulted. Bondholders recovered about 40 percent of their principal and interest...nearly 10 years later.

--$439 Million. Las Vegas. Muni bonds that supported the monorail defaulted due to mechanical problems and lack of ridership. Subsequently, the company who insured the bonds (Ambac) filed for bankruptcy, raising the question about other the solvency of other bond insurers.

--$341 Million. Stockton, California. Because of a lack of fiscal stewardship the city filed for bankruptcy last year. Some of the bonds are "backed" by insurance, but the city has requested bondholders shoulder some of the uninsured losses.

--$262 Million. Harrisburg, Pennsylvania. The state capital fell into default when it failed to honor payment guarantees on a troubled incinerator project.

I'm not implying that there is a default epidemic...yet. After all, critics to my argument would say that muni bond defaults are relatively rare. They cite rating agencies statistics showing historically low patterns of default, well under 100 defaults in total. But rating agencies only track muni bond defaults on municipalities that they rate. A recent finding from the Federal Reserve Bank of New York, however, tells a different story. The Fed discovered 2,527 muni bond defaults from 1950-2011, trumping the fanatical claim of low default rates among muni bonds.

HOW TO OWN MUNIS, IF YOU MUST.

While I'm personally not a fan of muni bonds (specifically in the current environment) I understand and appreciate their allure. If you must absolutely have an allocation to munis I believe the best avenue is to own diversified muni bond ETFs, or for more control and transparency, a separately managed fixed income account that can be custom-tailored to you.

Robert Russell is the best-selling author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and has been interviewed by CNBC, FOX Business, The Wall Street Journal, and several other national and international media outlets.



More From US News & World Report

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Deutsche Bank worries hit US stocks
    Deutsche Bank worries hit US stocks AFP News - 8 minutes ago

    US stocks tumbled Thursday after a report on withdrawals from Deutsche Bank revived worries about the health of one of the world's largest banks. News of the withdrawals sent a shudder through Wall Street, where trade had been muted earlier in the … More »

  • Senator: Education Dept. mishandling Corinthian student debt
    Senator: Education Dept. mishandling Corinthian student debt Associated Press - 22 minutes ago

    The Education Department is pursuing debt collection — rather than debt relief — for nearly 80,000 former students of Corinthian Colleges, despite federal and state findings that the now-defunct for-profit ... … More »

  • ECB's Nowotny says Europe not facing new banking crisis
    ECB's Nowotny says Europe not facing new banking crisis Reuters - 23 minutes ago

    European Central Bank Governing Council member Ewald Nowotny said on Thursday he did not believe that Europe faced a new banking crisis similar to that seen in 2007 and 2008, but the financial sector was clearly in a transitional phase. During the … More »

  • MSCI Still Monitoring China A Shares After ‘Positive’ Signs Bloomberg - 41 minutes ago

    MSCI said it has seen a “marginal” drop in the number of suspended mainland shares after Shanghai and Shenzhen exchanges released stock suspension rules in late May. The announcement comes after MSCI in June cited accessibility issues among the … More »

  • Oil rises close to $50/bbl; doubts on OPEC plan cap gains
    Oil rises close to $50/bbl; doubts on OPEC plan cap gains Reuters - 47 minutes ago

    Oil jumped more than 1 percent on Thursday, with Brent nearing $50 a barrel on optimism over OPEC's first planned output cut in eight years, although gains were limited by doubts the reduction would make a substantial dent in the global crude glut. … More »

  • Oil rises close to $50/barrel; doubts on OPEC plan cap gains
    Oil rises close to $50/barrel; doubts on OPEC plan cap gains Reuters - 48 minutes ago

    Oil jumped more than 1 percent on Thursday, with Brent nearing $50 (39 pounds) a barrel on optimism over OPEC's first planned output cut in eight years, although gains were limited by doubts the reduction would make a substantial dent in the global … More »

  • Stocks Fall as Deutsche Bank Woes Roil Lenders; Treasuries Climb Bloomberg - 50 minutes ago

    Equities erased gains after Bloomberg News reported about 10 hedge funds that do business with the German lender have moved to reduce their financial exposure. Traders pushed down the value of equities after the report on Deutsche Bank rekindled … More »

  • ECB's Lautenschlaeger says bank needs to craft exit from stimulus  Reuters - 51 minutes ago

    FRANKFURT (Reuters) - The European Central Bank should not provide further stimulus, including through stock or bond purchases, but needs to carefully craft its exit from asset buys to avoid turbulence, ... … More »

  • Nutanix IPO shows risks of 'unicorn' valuations Reuters - 52 minutes ago

    In the run-up to its initial public offering, cloud computing company Nutanix scrambled to avoid a situation that has increasingly marred technology IPOs: a price that's below the most recent private funding round. After bumping up its price … More »

  • US stocks tumble on worries about Deutsche Bank AFP - 52 minutes ago

    Wall Street stocks tumbled Thursday on renewed worries about banks following a report on withdrawals from Deutsche Bank and a bruising Capitol Hill hearing with the head of Wells Fargo. The Dow Jones Industrial ... … More »

  • $1 Coal Mines Turn to Jackpots as China’s Cuts Power Price Rally Bloomberg - 1 hour 8 minutes ago

    Stanmore Coal Ltd. bought the Isaac Plains metallurgical coal mine in Australia for A$1 in July 2015 from Brazilian miner Vale SA and Japan’s Sumitomo Corp. when the price of met coal, used to make steel, averaged the lowest in about a decade and … More »

  • With Deal Done, OPEC Faces Hurdles in Making Output Cuts Work Bloomberg - 1 hour 8 minutes ago

    In an angry and sometimes incoherent briefing, Iraq’s oil minister railed against the journalists and analysts who estimate the amount of crude each member produces. Iraq’s minister, Jabbar al-Luaibi, complained in Algiers that published estimates … More »

  • PBOC Seen Switching to Broad Monetary Tightening as Soon as 2017 Bloomberg - 1 hour 8 minutes ago

    Seven expect the PBOC will make its next broad policy move by guiding interests in a corridor using changes to short, medium and longer-term lending facilities. Just one economist forecasts the next policy move will be a change to benchmark … More »

  • Indonesia Raids Google Office After Warning on Tax Audit Refusal Bloomberg - 1 hour 8 minutes ago

    Officers visited Google’s office in central Jakarta “many times” in the past two weeks to collect data and repeatedly sought meetings with senior company officials, Muhammad Haniv, the head of special taxpayers at the Finance Ministry, said in a … More »

  • Singapore’s ‘Golden Week’ Courts China Tourists as Retail Falls Bloomberg - 1 hour 8 minutes ago

    Brands from Estee Lauder to Nike to Samsonite are offering discounts in the city-state starting Friday, coinciding with China’s National Day public holidays. Singapore is trying to revive its flagging retail industry, where sales excluding motor … More »

  • ECB's Nowotny says expects Austria to resolve Heta crisis
    ECB's Nowotny says expects Austria to resolve Heta crisis Reuters - 1 hour 11 minutes ago

    European Central Bank Governing Council member Ewald Nowotny said on Thursday he expected Austria to resolve a crisis surrounding the "bad bank" Heta Asset Resolution (HAABI.UL). Nowotny told Reuters he expected Austrian Finance Minister Hans Joerg … More »

  • Oil gains, Deutsche Bank weighs on stocks; yen cuts losses
    Oil gains, Deutsche Bank weighs on stocks; yen cuts losses Reuters - 1 hour 16 minutes ago

    By Rodrigo Campos NEW YORK (Reuters) - Crude oil futures rose on Thursday, adding to the previous session's rally on optimism over an OPEC plan to curb output, while stocks fell as Deutsche Bank tumbled ... … More »

  • Oil prices rise despite doubts over OPEC output deal
    Oil prices rise despite doubts over OPEC output deal AFP News - 1 hour 20 minutes ago

    Oil prices added Thursday to steep gains fuelled by OPEC's deal to cut crude output, but analysts doubted the cartel's ability to seriously tackle a supply glut. Following a meeting that included Russia, the Organization of the Petroleum Exporting … More »

  • How the Dow Jones industrial average fared on Thursday Associated Press - 1 hour 26 minutes ago

    U.S. stocks skidded Thursday as drug companies and banks absorbed large losses. Drugmakers faced scrutiny over price increases, while banks fell as investors worried about the stability of Deutsche Bank ... … More »

  • 'Farmville' creator Zynga names former EA executive CFO
    'Farmville' creator Zynga names former EA executive CFO Reuters - 1 hour 32 minutes ago

    Zynga in March named EA veteran Frank Gibeau its chief executive, as part of efforts to transition into a mobile games-focused company. Griffin, a gaming industry veteran, spent more than 10 years at the "FIFA" videogame publisher. Zynga, once one … More »

  • Deutsche Bank admits 'perception issue' as U.S. shares slide
    Deutsche Bank admits 'perception issue' as U.S. shares slide Reuters - 1 hour 34 minutes ago

    Deutsche Bank (DBKGn.DE) admitted on Thursday it had an image problem with investors as fresh concerns over the stability of Germany's largest lender pushed its U.S.-listed shares to a record low. The latest lurch came after Bloomberg reported that … More »

  • U.S. energy envoy says OPEC deal likely to be self defeating Reuters - 1 hour 43 minutes ago

    The top U.S. energy diplomat said he has little faith an OPEC deal would raise world crude prices for long because America's drilling revolution and global efficiency gains mean energy markets are resilient to producer cuts. Details are to be … More »

  • US hedge fund to pay $400 million in African bribery case Associated Press - 1 hour 44 minutes ago

    Authorities in New York say a major U.S. hedge fund has agreed to pay more than $400 million to settle charges accusing it of using a web of middlemen to pay bribes to African officials. The Securities ... … More »

  • Markets Right Now: Stocks end lower on Wall Street Associated Press - 2 hours 1 minute ago

    The latest on developments in global financial markets (all times local): 4:00 p.m. Stocks are ending lower on Wall Street, led by drops in drugmakers and banks. Mylan slumped 4 percent Thursday after ... … More »

  • Boss of UK's John Lewis selected to run for West Midlands mayor
    Boss of UK's John Lewis selected to run for West Midlands mayor Reuters - 2 hours 7 minutes ago

    LONDON (Reuters) - British department store chain John Lewis will have to appoint a new leader after Managing Director Andy Street was chosen by the ruling Conservative Party as its ... … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.16+0.01+5.96%
    N21.SI
    0.112+0.003+2.75%
    40E.SI
    0.285+0.010+3.64%
    5ME.SI
    0.13+0.01+6.56%
    A50.SI
    0.107+0.002+1.90%
    40F.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.13+0.02+16.07%
    BEH.SI
    0.119+0.015+14.42%
    A7S.SI
    0.34+0.04+13.33%
    AYV.SI
    0.395+0.045+12.86%
    BQF.SI
    0.182+0.020+12.35%
    BGO.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.154-0.013-7.78%
    5WJ.SI
    0.16-0.01-5.88%
    5G1.SI
    0.185-0.011-5.61%
    B7K.SI
    0.100.00-4.76%
    42D.SI
    0.142-0.007-4.70%
    5AM.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3643+0.0003+0.02%
    USDSGD=X
    1.5305+0.0005+0.03%
    EURSGD=X
    1.7685+0.0004+0.02%
    GBPSGD=X
    74.0680-0.0030.00%
    SGDJPY=X
    5.6833-0.0007-0.01%
    SGDHKD=X
    3.02290.000.00%
    SGDMYR=X
    9,542.71290.000.00%
    SGDIDR=X
    4.88700.000.00%
    SGDCNY=X
    1.0411+0.0002+0.02%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,323.50-2.50-0.19%
    GCZ16.CMX
    19.17-0.02-0.09%
    SIZ16.CMX
    95.01-0.66-0.69%
    ^XAU
    2.190.00-0.07%
    HGZ16.CMX
    43.85+0.41+0.94%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.12-0.01
    ^FVX
    1.56-0.01
    ^TNX
    2.28-0.01
    ^TYX