Thursday, January 03, 2013

The Danger of Municipal Bonds

For some reason markets seem to be much more "jerky" than I would have ever guessed from standard economic theory.  I predict that one day in the next three years, the market will suddenly "realize" that's it's been mis-pricing the risk of municipal bond defaults and "haircuts", and the bond market will see a precipitous decline.  This WSJ story lists one of the principal risks that, in my opinion, the market currently isn't really discounting:
The municipal bankruptcy unfolding in Stockton, California is giving investors a bad case of deja vu. Just as the Obama Administration bailed out the United Auto Workers in Chrysler's bankruptcy while hanging bondholders out to dry, the city of Stockton is subordinating its bond debt to worker pensions. But what's really scary is that the Stockton case could be replayed in dozens of California cities.

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