For some months now, the municipal bond market has been in turmoil over the possibility that multiple issuers could default on their obligations. Much like how the mortgage-backed bond market cracked and then shattered, spreading chaos throughout the credit markets, the worst-case fear is that there could be a cascade of defaults throughout the country. These defaults would not only be serious for those who depend upon municipal bonds to fund some portion of their retirement needs, but also for the states and state-sponsored agencies that depend upon the muni market for capital. (For a little background and history of this market, check out Fatal Seduction Of The Municipal Bond Insurers.)
Moreover, just as the collapse of the mortgage-backed bond market spread far beyond the debt markets and into the stock markets and economy at large, so too is the fear that a wave of muni defaults will rattle the economy and stocks once again. With all of the worry and anxiety, then, investors have been selling out of these bonds, pushing yields to two-year highs.
The question, though, is whether equity investors need to really worry about how the muni market may influence their portfolios.
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http://financialedge.investopedia.com/financial-edge/0211/Whats-Going-On-With-Muni-Bonds.aspx
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