Muni Bond Defaults: The Good and Bad Side of Municipal Bonds
Muni bond defaults are far less likely to happen to investors who take the time to research the safest bids. However, this is not to say a conservative-minded investor is "untouchable". People can get burned in the bond market; thus, it is always necessary to buy municipal bonds with a strong degree of caution, conducting thorough research and bond analysis before biting the hook. By doing so, municipal bonds will, far more often than not, benefit those who wisely pick and choose their bond portfolio, assembling the smartest bids by hand.
What Could Go Wrong with Muni Bonds?
The primary issue facing municipal bonds is the concern that municipalities will have reached a point where they have borrowed too far beyond their means and may start to consider finding loopholes to get out of repaying bond buyers.
Muni bond defaults, although historically uncommon, can still be an unfortunate dose of reality for those who ignore the excessive debt that faces the nation, while recklessly investing in whatever debt securities they fancy. While the frequency of muni defaults is on the downslide in 2010, one has to question how much longer municipalities can run on borrowing and spending before they decide to slip out of their end of the bond bargain and leave investors out in the cold.
The fact is, over the last decade, state and local debt has nearly doubled to a whopping $2.4 trillion dollars. Bond issuing and buying has been on a steady rise during this time, but the projects that municipal bonds have funded have often been dubious. For example, issued debt aimed to increase tourism in local areas has notoriously underperformed, doing little to help municipalities fix their predicaments.
The wisest of investors will see the potential for muni bond defaults in these speculative projects and will instead focus on bonds backed by essential services.
Municipal Bonds Remain Sturdy for the Time Being
Fortunately, while many have justifiably expressed concern over the future of widespread muni bond defaults, the market still continues to expand. While municipal bonds have worked well (primarily for those of high net worth) in the past, they are now more accommodating for the individual investor as well, who can gain exposure to the respectable yields and bond values that munis command through online bond analysis tools that were once only accessible by the investing elite. The future forecast for the bond market is still uncertain, but bonds remain a worthwhile investment for the time being.