Are Muni Bond ETFs Facing an ‘Inflection Point?’

August 9th at 2:22pm by John Spence

Noted analyst Meredith Whitney is back in the news with a prediction that local governments are nearing a financial “inflection point” that could result in them not honoring their debt obligations.

In late 2010, she was out with a controversial call on “60 Minutes” that the muni bond market would suffer massive defaults.

That forecast hasn’t panned out, although it did trigger a short-term shock in muni bonds and ETFs that invest in the sector. [Meredith Whitney Sticks to Her Guns]

Muni bond ETFs have trended higher the past few months despite San Bernardino recently becoming the third municipality in California to file for bankruptcy. [Muni Bond ETFs Yawn at Latest Bankruptcy]

In a CNBC appearance this week, Whitney forecast more financial stress ahead for local governments.

“You haven’t seen state and local governments cut to the degree they have,” she said. “Now you reach a point where it’s an inflection point: At what cost am I going to honor my pension obligations?”

High-net-worth investors like muni bonds for their tax exemptions.

Although defaults are historically rare in the muni bond market, holding a broad-based ETF provides “the benefit of diversification to help protect investors from the idiosyncratic risk of holding any individual issue,” says Morningstar analyst Timothy Strauts in a report on iShares S&P National Municipal Bond Fund (NYSEArca: MUB).

“The credit issues of municipals are not an impending panic that will hit the market all at once like the Greek sovereign-debt crisis. Each municipality has its own unique and varied issues that will be confronted on their own schedule. Owning a diversified fund like MUB will help smooth out any issues an individual issuer runs into,” he adds. “Normally a very docile sector of the market, muni bonds have increased risk because of the budget issues at state and local governments.”

iShares S&P National Municipal Bond Fund

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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