Wednesday, February 27, 2008

Muni troubles 
I missed it earlier, but a commenter asked me what I thought of the current difficulties surrounding municipal bonds.

I think it's very exciting.

Look, cities and counties and states are not going to go out of business any time soon. All of them have the power to tax and to raise revenue. Some of them will take it on the chin in the short run, because of the decline in property tax receipts. But the dry up in muni bond demand affects far more bond issuings and auctions than ones supported by property taxes.

What's happening is that entities that want to raise money, and bondholders who want to sell, rather than retain their bonds and collect the interest payments on them, are having to deeply discount their bonds in order to unload them on the aftermarket. It's crazy. There is nothing seriously wrong with these issues that warrants these yields to maturity that look like credit card interest rates, when you take the discounts into account.

Warren Buffett thinks they're fundamentally sound, too. At least, the ones being issued for cheap. How do we know? Because he just launched a business insuring municipal bond interest payments.

I'm fairly confident he's made a few purchases, as well - quietly, which he doesn't have to declare - and for fundamentally the same reasons: Our cities, by and large, will continue to make their promised interest payments and principal payments on time.

Splash, out


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