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Municipal Bond Portfolios – Risky Business?

by Anthony F. Prieto, Jr. CFP

Most investors do not completely understand the Municipal Bond Market.  In today’s economy, that should be a major concern.

Several municipalities (Harrisburg, PA and Jefferson County, AL) are considering bankruptcy and even more are not paying any interest on their debt.  No municipal bond is guaranteed and you can lose any interest and principal.  The principal is often lost when investors experience lost interest payment.  Many of them live off the monthly interest payments.  When those are stopped, the investor has little choice other than selling the bond at a discount.  This creates a loss of principal.

Here are a couple of excerpts from articles this year:

“The risk of municipal-bond defaults in the future is “higher than it’s been in quite some time,” said Deutsche Bank’s Pollack, because of the unprecedented stress on state and local budgets. From 1970 to 2009, the average five-year default rate was 3.43 percent for speculative-grade debt, Moody’s said. Harrisburg, the capital of Pennsylvania, has considered filing for reorganization under Chapter 9 of the U.S. bankruptcy code as it faces $68 million in debt.

About $2.4 billion of Florida’s so-called dirt bonds, or debt to finance real-estate developments, used reserves or failed to make interest payments in November, up from $1.7 billion in May, according to Interactive Data Corp. That’s the largest amount on record and “reflects an increasing trend,” said Edward Krauss, an analyst for the Bedford, Massachusetts- based research firm, in an e-mail. “

Bloomberg by Margaret Colling, March 10, 2010.


 “With the pace of recovery still sluggish, the consequences of the recession will be playing out in America’s cities and towns, on Main Street and in the lives of families for years to come,” stated Christopher W. Hoene in a report prepared for the National Leagues of Cities (NLC), based in Washington D.C.


According to the NLC report, between 2010 and 2012, municipalities will show a deficit that could reach $83 billion, due to decreases in tax revenues.

The NLC report states that Baltimore, Md.; Augusta, Maine; Boston, Mass.; Cleveland, Ohio; Columbia, Mo.; Dallas, Texas; Denver, Colo., Little Rock, Ark.; Los Angeles, Calif.; San Francisco, Calif., Seattle Wash.; and Springfield, Ill., could face deficits.

The Epoch Times Online by Heidi Mohaltra on June 8, 2010

Settlement Asset Management is in a unique position to offer both guaranteed and professional managed money solutions.  We have access to a variety of investment vehicles to insure the safety of your client’s settlement dollars.

Please contact Anthony Prieto, CFP® for more information.  He can be reached at 866-833-4402 or anthony@sam-trust.com.

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