We hold these truths to be self-evident, that all men are created equal, but not all government bonds are created equal
Source: Declaration of Independence, with modification
If you believe the media there is panic in the municipal bond market, with certain large muni bond funds seeing precipitous drops in recent weeks and months.
Yet, at the same time, and in the same media, you can read reports of entities seeing the drop in value as a buying opportunity.
What is rational behavior in this market?
First, ask yourself “How many times have I read about an actual default by a government?” The answer should be “Not often”. Usually the defaults are associated with some form of gross mismanagement or corruption. That is why reported defaults, followed by bankruptcy and debt elimiation are extremely rare.
Orange County’s default was related to gross mismangement and corrupt practices, not an ecomonic downturn. Harrisburg’s problems are related to an ill-conceived plan to develop an incinerator.
What is rational in this economy is not to panic but to know your investment. In the vast majority of cases governments and government bond issuing agences are not allowed to engage in speculative ventures that put capital at risk. Infrastructure projects, ones that serve the general public good but that are not meant to be self-funded – such as incinerators, funded by fees – invariably are backed by the full faith and credit of the taxpayers. Though we, the tax paying public, are rue to pay more taxes we are also, like most citizens, going to do everything we can . . to avoid the stigma and consequences of bankruptcy for our communities.
Remember in 2008 the Dow Jones industrial average broke 7,000, diving to about 6500?
Panic selling took hold.
Today, 2+ years later, the Dow is approaching 12,000. Those who sat anxiously on the sidelines have had to comfort themselves with knowing “Well, at least my losses weren’t worse”.
Yes, at least they weren’t worse, but missing the boat from 6600 to 11,800? That’s irrational.
Investigate your bond holdings. Know what you are invested in. Times are tough and chances are they will remain tough for taxing entities for several more years, but that doesn’t mean governments will default on their obligations. That’s just bad business and governments intend to remain in business for a long long time.
Do your research and you may decide, like some, that one man’s fear or panic is another man – or woman’s – buying opportunity.
Just like buying Bank of America at $3.89 was.
Do your due diligence. Speak to a bond professional. Call the mayor. Then decide.