The municipal bond exchange traded fund (ETF) market experienced a fair amount of turbulence on the heels of the Fed’s quantitative easing. Still, ratings firms believe that most municipalities will pull through.

Municipal bond-related investments have experienced high volatility in the past couple of weeks as a result of the high debt burden of states and municipalities and the Fed’s fiscal policy decisions, reports Andrea Tse for TheStreet. Muni bond funds saw outflows of around $2.37 billion in the week ending Jan. 12. [Muni ETFs Suffer Record Outflows.]

Additionally, Meredith Whitney, the U.S. financial analyst who accurately predicted the global credit crisis, also stated a few weeks back that over 100 American cities could go bankrupt and their issued bonds would default in 2011 as total debt of municipalities hit $2 trillion. [Is There Hope for Muni Bond ETFs?]

However, states like California, Illinois and New York are finding that their revenue streams do not cover their deep budget deficits, creating concern among investors that the states could default on muni bond obligations, writes Hibah Yousef for CNN Money.

Standard & Poor’s credit analyst Gabriel Petek stated that they “believe that continued revenue decreases for state and local government may increase fiscal strain on budgets, and monitoring of liquidity will be especially important in 2011.” The S&P maintains that the majority of state and local governments will be able to hold onto their medium to high investment-grade ratings.

Note that municipal bonds are of higher quality than some other fixed-income securities, but there is still risk. To mitigate it, we suggest a simple strategy, such as trend following. This has you in the markets during potential long-term uptrends while managing your downside risk. Right now, muis are well below their trend lines; it might be time to look for other opportunities.

For more information on munis, visit our municipal bonds category.

  • PIMCO Intermediate Muni Bond Strategy (NYSEArca: MUNI)
  • Market Vectors High Yield Municipal Index (NYSEArca: HYD)
  • SPDR Barclays Capital Municipal Bond (NYSEArca: TFI)
  • Market Vectors Lehman Brothers AMT-Free Long Municipal (NYSEArca: MLN)

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.