Bond Analysis: Saving Yourself from Municipal Bond Defaults

Bond analysis has saved many a smart investor who takes the time to conduct personal research in lieu of blindly following the major ratings agencies. This sort of vigilance will be especially important now, as a massive tidal wave of municipal bond defaults are coming our way, according to many who feel Harrisburg, Pennsylvania's recent move to opt out on repaying investors will become a catalyst for the death and destruction of municipal bonds. While you may or may not believe that muni bonds are teetering on the brink of something awful, recent events show that bad things can and do happen in the municipal bond market, stressing the importance of individual investors exercising patience and bond analysis.

Harrisburg Waves a White Flag

Due to massive debt woes, and a botched $288 million dollar effort to get a city trash incinerator up and running, Harrisburg, Pennsylvania announced it would be skipping a scheduled payment to general obligation bondholders. This unfortunate occurrence has the dubious distinction of being one among the top 2 largest G.O. municipal bond defaults in 2010, and the result: Investors are now collectively being shorted a total of $3.29 million.

Only bond analysis could have foretold this catastrophe, as the major ratings agencies saw fit to assign top ratings for these ill-fated instruments all the while.

Bigger Problems for Muni Bonds

Naturally, one will find reactionary news items declaring the beginning of the end for the muni bond market. Investors who've turned to muni bonds as a safe haven from the volatility of the stock market are now being warned that they've jumped out of the frying pan and into the fire, though this is not necessarily true for those disciplined investors who put stock into bond analysis.

While stormy waters may be ahead for the bond market, should interest rates shoot up, the FED will be buying up government debt this week, and interest rates should drop in short order.

Avoiding Municipal Bond Defaults with Bond Analysis

Although we've been harping on about the historically low rate of municipal bond defaults, individual investors are at risk. Rather than leaving your fate in the hands of ratings agencies, seemingly run by space cadets far removed from the reaches of reality, it is important to perform personal bond analysis and leave no stone unturned. Municipal bond market conditions could conceivably get bleak, creating an environment that is cruelly unkind to those who borrow carelessly. Just play it safe; you'll profit.