Municipal bonds have been considered one of the safer investments for years, and the added bonus of tax-free interest is hard to beat. The days of considering a municipal bond as safe is over though, as the use of the bond as a vehicle for public projects has radically changed, and it is no longer possible to know which ones are really safe any longer.

What has changed is what the bonds are being used for and the economic climate we continue to live in.

One recent example, if you haven’t heard of it, is Tison’s Landing.

This is a place where municipal bonds were issued to pay for a property developer to place the infrastructure of a planned community. They would put in the electricity, roads, etc., and theoretically, when the houses went up the residents would pay for the interest on the bonds.

In the beginning, the developer would pay the holders of the municipal bonds the interest until the homes went up and were occupied. The problem? No one bought the homes, and there is a piece of property ready for homes to be built with no one interested in buying them.

So if no one is building homes, what happened to the interest on the municipal bonds? Is the developer still paying it? No the developer isn’t. The holders of the municipal bonds, usually pension funds or mutual funds are the ones paying the interest, and many of them are getting rid of the bonds at up to 70 percent losses so they can use their capital in growth areas.

This is complex, but the bottom line is municipal bonds are no longer the places of safety they used to be, and because of the ongoing economic disaster, you can’t be sure which region or locality will suffer next, or even know how to research to find out if it’s vulnerable. There are too many variables and unknowns at this time to get the needed data to make an informed decision.

A growing number of financial advisers are recommending their clients to get out of municipal bonds. Many of them are being used to back up developments like the one mentioned in Florida above, and if any city is near bankruptcy, you’ll find yourself in a similar situation the mutual and pension funds are now in.

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Tags: Municipal Bonds, saving strategies

This entry was posted on Monday, March 15th, 2010 at 7:00 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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