As you know, we are not big fans of Municipal Bonds. You will not find a single Municipal Bond among the 10,000 – 14,000 holdings in any of the Academically Managed accounts that many of you own through me. But often, retirees and those preparing for retirement are heavily invested in municipal bonds and bond funds. Unfortunately, in many cases, their advisors may not have disclosed to them the significant risks that such a strategy bears.
According to recent article in Forbes magazine; “cities and counties can file for bankruptcy, but states can not.” Many states, including New Jersey, Illinois and California, are having serious financial difficulties that could very well cause havoc with their obligations to Municipal Bond holders. Many advisors, however, believe that the Federal Government will simply step in and bail them out. Also included in the aforementioned article in Forbes, “the Federal Reserve does not have the political power to buy troubled states bonds the way the European central bank has been vacuuming up dodgy paper from the likes of Greece.”
Well, just this past Friday, January 7, 2011, Ben Bernanke, the Chairman of the Federal Reserve Board, told us what to expect. According to the Wall Street Journal, Mr. Bernanke said that “We have no expectation or intention to get involved in state or local finance.” Later, he emphasized that “states should not expect loans from the Fed.” Mr. Bernanke did hedge a bit, according to the Journal and “played down the risk of a major municipal-bond crisis.” He said that it would be in the hands of Congress.
Don’t risk your retirement with a Municipal Bond portfolio. Why take that unnecessary risk if you don’t have to. If you, or someone you know, own Municipal Bonds or Municipal Bond Funds, you will find this video very informative. Please call the office to discuss the alternatives.
2011 may very well be “The Year of the Broken State.”