Sunday, October 26, 2008

To Muni Or Not to Muni

Municipal bonds, known as munis, have historically been the safest bonds on the market (save for the Orange County meltdown in the '90s). Buffet's been a longtime fan of them, and shows no sign of withdrawing his faith. Their payments are often tax exempt, they're safe, and they're popular. The muni market is estimated at $1.7 trillion.

But let's assume (as noted earlier), that the states, facing massive budget deficits, will soon collectively petition the federal government for a bailout package of their own (remember, the projected New York State budget deficit more than doubled in the last two months). When that happens, it will deliver a crushing blow to confidence in the treasuries and bond markets, and some municipalities could be faced with default.

As American municipal budgets go, Greenwich, Connecticut has one of the sweetest set ups. The hedge fund capital of the world is a small town, with a massive tax base, low population, a relatively small public school system (many of the kids go to private school), low crime, and no pressing infrastructure projects. But the Greenwich Citizen reports that the town faces a $4.2 million budget deficit, has frozen all new hires (despite the need for 40 new positions) and is preparing to cut further spending.

I'm not saying that munis are slated for massive default because Greenwich is in the red, but if I were sitting on a bunch of munis, I would start pulling out of them now. As the last month has shown, the name of the game now is getting out of the way of the next crisis before everyone else does.