Why Municipal Bonds Aren't the Answer

US households are piling into municipal bonds. The household sector accounts for 80% of all flows into munis over the last three quarters, according to the Federal Reserve’s flow of funds report.

Of the $2.8 trillion in municipal debt currently outstanding, households hold $1 trillion. And that doesn’t count what they hold indirectly through banks, insurance companies, mutual funds and so on.

We can just imagine what the average broker is telling his clients right now: “If you think stocks are too risky right now, munis are the perfect way to earn a respectable return. And munis are always a place to turn at a time like this when income tax rates are likely to rise.”

Yikes. As we point out in the current issue of Apogee Advisory, municipal debt holds the same laundry list of risks that subprime mortgages did in 2006.

Dave Gonigam
for The Daily Reckoning