Why Munis?-Obama!

And now, for the fourth and final segment of my series entitled, “Munis: So Hot Right Now.” Although the subject matter seems as though it should have been posted before my last segment, I felt it necessary to put this part last to emphasize the strength and security of municipal bonds. I am of the opinion that munis really are a shining beacon of hope in an otherwise dismal economic situation. I hope that, by the end of this post (and the series as a whole), you will understand and take action as well.

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IV. Why munis as opposed to other bonds/equities?
Besides the awesome feeling you’ll get knowing that you’ve invested directly in community (state and national) resources, what reason is there to put your money into munis rather than the countless other bonds and equities at low prices? Let’s not forget that low prices generally mean things are going bad - hence, the term “junk” bonds. Doesn’t the same danger of bankruptcy apply to munis too?

Let me answer that question with another question. When is the last time you heard of a municipality defaulting? Have you ever really heard of a state, or a city, going bankrupt? Sure, it’s happened before, but the rate of default for munis is extremely low. If public stocks have about a 3% chance of defaulting (I’m guessing here), then corporate bonds have a rate of about 1%. Municipal bonds are approximately 1/100 as likely to default as their corporate cousins. Think about how low that risk is in contrast to your potential gains (see above example)!
Why is the rate of default so low for munis as opposed to equities or other types of bonds? It all comes down to the nature of state/city finances versus those of corporations.

Corporations are powerful money magicians. They have tricks (stock options, derivatives, multiple books etc.) to pull money out of thin air and/or distract the investor from what’s really going on with company finances. It’s all very dangerous and unwieldy, and it’s the fundamental reason behind the credit crunch we’re experiencing now.
Municipalities (state/city/national holdings), on the other hand, care only about one thing - balancing the budget. There are no funky backroom dealings. Everything is out there on the table. It’s like your mom told you - honesty is the best policy (especially in finance).

Furthermore, we have Barack Obama coming in as our next president. Although his socialized leanings on economic policy reform are questionable, they suggest that he’s highly unlikely to let a state or city experience financial distress for very long. I mean, come on - bailing out a township is going to receive more positive feedback than the recent corporate bailouts, at least from the American public.

Obama is good for municipal bonds

From examples and from recent historical context, we have learned that munis are smart, cheap, and efficient. The time to take advantage is now, though - don’t wait. It may be a while, or it may be next month when President Obama lays down another TARP for municipalities - in which case, these bonds will go up in price and yields will be realized even quicker. I wish you the best of luck in the upcoming fiscal year - may the muni be with you.

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That’s it for my series. I hope you enjoyed it - and if you have any questions, please use the contact form to reach me.

-Rico