Are municipal bonds affected by the "credit crunch."?
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ANSWERS: 2
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Even municipal bonds, which are considered some of the safest fixed-income instruments, have been affected. But don't worry, munis haven't been affected the way you might expect. They are still considered safe places to park money. If anything, they are suffering from a side-effect of the subprime debacle. Here's what's going on: At the root of the problem are bond insurance companies, such as Ambac and MBIA. These companies are in the business of guaranteeing bond payments to make investors feel better about buying the bonds. Normally these firms insure stable bonds and have plenty of cash on hand to handle losses. A good portion of the bond insurers' business comes from guaranteeing bond payments by cities, states and local governments that borrow money using municipal bonds. Municipal bonds have been extremely safe over time, and they don't really need insurance. But sellers of munis offer insurance to attract investors from outside the issuer's immediate region. http://www.usatoday.com/money/perfi/columnist/krantz/2008-03-13-municipal-bonds_N.htm
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Municipal bond defaults continue to be near zero, according to a closed-end ETF customer service agent that I spoke to yesterday.
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