News Column

Dust has settled after fears were proved wrong

May 12, 2014

Matt Krantz,, USA TODAY

A: Haters had a field day with municipal bonds last year. Overblown fears about what the situation in Detroit and Puerto Rico would mean for munis caused bond prices to suffer.

But investors are now waking up to the fact that they very possibly overreacted to the scary headlines last year.

The S&P Municipal Bond Index is up nearly 5% this year, which tops returns by both corporate bonds and stocks, says Standard & Poor's. Muni bonds are investments typically favored by highly risk-averse investors. These are debt obligations issued primarily by state and local governments. Investors seeking safety gravitate to munis, which have relatively low rates of default because they're usually backed by local taxing power. The financial difficulties in Detroit and Puerto Rico had nervous investors fearing that these local problems would somehow disrupt the entire muni market. Those fears were not just unfounded, but downright wrong.

The current rally in muni bonds is simply the market readjusting the pricing to reflect these misguided worries. In fact, the entire bond market is enjoying a rally this year as investors decide that they worried too much last year. The Vanguard Total Bond market exchange-traded fund is up 1.9% this year.

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Source: USA Today