Wednesday, May 19, 2010

Do You Know Where Your Muni Bond Fund is?

The vast majority of us who own municipal bonds, do so inside of a mutual fund.  But munis may be in a bot of trouble with more on the horizon.

We want to believe it simply isn’t so. Municipal bonds or munis, those hometown or home state, often tax exempt debt instruments which are favored among the 
retired, the soon-to-be retired or those looking for a conservative but well-paid return may be facing a little headwind. But truth be told, you should have noticed.

When you buy a municipal bond, you are essentially buying a project believed to be worthwhile for the city, county or state issuing the debt. They are rated in much the same way as a corporate bond is with a single exception worth noting. If a municipality issues a bond and has difficulty paying the coupon, they often simply raise the local tax rate to cover the shortfall. But like all sorts of funding, the increased tax revenue that would pay for the bond payment shortfall is also in short supply.

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