Municipal Bonds Are Making a Comeback
As it has become increasingly difficult to find investments with positive gains, municipal bonds have begun to surge to the forefront. The yields on muni’s have become comparatively attractive in recent months due to a number of factors.
Although a shaky stock market tends to have investors fleeing into the warm embrace of the bond market, things are a little different this time around. The bond market is having it’s own little crisis at the moment.
Bond insurers are reeling from the fallout of the sub prime mortgage collapse with many firms in that industry having lost or are in danger of losing their AAA ratings. This has in turn added an aspect of volatility to a normally placid market.
This added uncertainty along with renewed fears of inflation, due to the Fed’s recent aggressive moves, have sent bond prices falling recently and yields up. These higher yields coupled with their tax free status have led many financial analysts to extol their virtues.
If anything, the recent troubles in the bond market have made muni’s even more attractive. While the short term risk has grown considerably, the long term risks are negligible.
This is due to the fact that historically, muni’s have a miniscule default rate, less than 0.01%. Even non AAA rated muni bonds have a lower default rate than their AAA rated coporate counterparts. As a long term investment, it’s one of the safest bets around.
