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Always Borrow Money From a Pessimist - Friday, 09/21/2012

"Always borrow money from a pessimist; he doesn't expect to be paid back." -Unknown

Not only aren't investors in municipals pessimists, but these lenders are also optimistic that they'll get their money back with interest. Perhaps this is a reversal of expectations.

Therein lies a tenet of today's financial journalism. I believe most people expect municipal bonds to meet their obligations and repay creditors. When we suddenly find ourselves staring at headlines that trumpet the failings of locations such as Harrisburg, PA, Stockton, CA and Jefferson County, AL, journalists wring their hands, despairing that the standing dominoes will fall.

As many have noted in the past two years, a unique and important feature of municipal investing is the historically low rate of defaults that is in evidence, especially for investment grade rated bonds. Bonds rated below the investment grade spectrum or not rated at all generally have been less likely to fail than their corporate counterparts.

Then why the great concern?

The answer resides somewhere between our emotional attachment to our own communities, which issue bonds, and our distaste for paying taxes. I am guessing that many of us have come to expect that the same government structure that issues munis may seek to protect them from failure. If default ensues, we fail too.

I suggest that we take comfort from the facts at hand. Municipals have been generally stable, and while the ride may get a little bumpy, I believe the highway, built by municipals, will continue to deliver us, and our money, to our destination.

*The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Long Municipal Bond Index is a sub-set of this broader index. 


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