Municipal Bonds In Trouble

By Carl Swenlin at Decision Point

It has been a constant theme in the news for some time that state, county, and local governments are under severe pressure because revenue and revenue projections are falling far short of spending plans. Here in California we are facing a budget deficit of about 25%. Can you imagine? I have heard that some California bonds, I presume the most recently issued, are yielding over 8%. That’s tax free . . . if you can collect. Yes, munis are insured, but the problem is nationwide, and the ability of insurers to meet their obligations must be coming into question.

The following is a chart of the Municipal Bond ETF. While it is down only about 8%, the perspective offered by the chart shows it has fallen off a cliff.

I am pleased to note that our Trend Model signaled an exit relatively early in the decline when the 20-EMA crossed down through the 50-EMA. A positive indication is that volume is contracting into the decline.

Bottom Line: I think MUB is a good indicator of the public’s perception of the municipal bond market and the state of public finances in general. At present that perception is being severely stressed.

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by Andrew Wilkinson, Senior Market Analyst at Interactive Brokers

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