Municipal Bond Market Crash – Why Could It Happen?

Municipal Bond Market

Is a municipal bond market crash possible, and if so why could this happen? Municipal bonds can be found in many varieties, and these are usually viewed as safer investments than stocks and other choices. There are insured municipal bonds, tax exempt options, and many other types. All of these bonds are offered by municipal entities though, which are dependent on taxpayer dollars in most cases to repay the debt. The main reason that a crash could occur in the municipal bond market is the debt the municipality has and the current economic conditions, both in the USA and across the world.

California municipal bonds are a good example of poor economic conditions and high amounts of debt. In the past muni bonds were looked at as a reasonably safe option when compared to stocks and other choices, but this has changed. As municipal entities have taken on larger amounts of debt and the level of revenue has dropped substantially because of unemployment and business closings it becomes more difficult to meet the the payments on the bonds. Very few bonds in the municipal bond market are rated AAA, because most rating agencies have reassessed the credit worthiness and risk of default.

Municipal bond insurance may also play a role in any crash, because the ability of the insurers to pay off claims for defaults may be limited if many entities default at the same time. Bonds which are insured have a higher credit rating than those which can not be insured, but they are still not completely guaranteed. A municipal bond market crash could have repercussions on all of the global markets, and affect every country. If debt is not brought under control on all levels, from the federal government down to most cities and towns, and revenues are not increased then a crash is very possible. If this happens then even tax exempt municipal bonds will be affected.