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I'm no bond expert, but aren't munis discounted in part due to default worries? There's a fear that a second wave of municipalities that survived the first wave
by mjn 13y ago
I'm no bond expert, but aren't munis discounted in part due to default worries? There's a fear that a second wave of municipalities that survived the first wave of post-crisis bankruptcies may still succumb, since many avoided default by doing miscellaneous stop-gap and accounting tricks that may not be repeatable. Hence a risk premium.
- gfodor 13y agoYes this is likely part of the reason but in general the discount arose due to the fed tapering issue since the discounts on all fixed income have widened together since. Regardless, a particular muni fund will be exposed to thousands of municipalities, so default risk is essentially diversified away, particularly if you invest in a managed fund where the fund managers have a track record of understanding the municipalities they invest in. Unless you are a devout believer in the efficient market, one could argue that the discount could in part be due to irrational investors selling their munis to buy equities in a media environment where scary headlines about Detroit going bankrupt are on CNN and Facebook stock doubles since it's IPO.
- thatthatis 13y agoThose factors can account for a decrease in the asset price, but not for a 10% discount to the going asset price by buying through a closed end fund.