Traditionally, municipal bondholders have always been at or near the top of the list of "conservative" investors.
But these financially uncertain times have higher levels of risk where there used to be very little. A conservative investor is one thing, while a conservative investment is another.
Indeed, Steve Forbes is using the "d" word. Here's how he put it in Forbes (Oct. 25 issue):
"Many observers think it's inconceivable that a state, large county or city would be allowed to default on its bonds. But unless the Federal Reserve oversteps its bounds and funnels money to strapped governments, municipal bond markets will indeed face the unthinkable."
Hardly a week goes by without a story about a city or state in serious financial difficulty, like this one from Bloomberg (10/5):
"Illinois’s deteriorating financial condition threatens to swallow up more than half its general- fund budget in the next fiscal year, Comptroller Dan Hynes said.
"Last month, Moody’s Investors Service changed the outlook on the state’s credit rating to negative from stable, which may indicate a cut will be made in grades affecting $25 billion of A1 rated general-obligation bonds."
You might suppose that negative financial stories about cities or states have stopped investors from buying munis, yet the opposite is true. Read this excerpt from the July, Elliott Wave Financial Forecast:
"...municipal bond holdings appear more popular than ever. In fact, foreign investors increased their holdings of munis to $71.9 billion in the first quarter of 2010, a 79.9% increase from the first quarter of 2009.
"The total was 10 times the level of 2000. U.S. households also increased their muni holdings to more than $1 trillion for the first time...The interest of the public and foreigners, two classic late-comers to financial trends, indicates that the trap may snap shut at any moment."
What was a relatively conservative investment before may be high-risk now. EWI's Robert Prechter wrote in"Conquer the Crash, 2nd ed." that munis will "ultimately trap investors."