Summary: Are muni bonds facing a wave of defaults?Back in 2010 celebrity-analyst Meredith Whitney made headlines by predicting 50-100 major defaults resulting in hundreds of billions in losses. Since then we’ve seen two or three--Jefferson County, Harrisburg, San Bernardino—troubled credits whose problems were well-known before Whitney’s 60-Minutes interview.But now we’re seeing a new round of problems: Rhode Island “Moral Obligation” bonds, and the City of Detroit. Detroit’s easy to understand. They’ve simply run out of money. Mismanagement and economic contraction have taken their toll, and Emergency Manager Kevyn Orr has suspended debt payments and offered a deal so draconian that many bondholders think they can do better in bankruptcy court.Rhode Island’s problem is linked to a failed business venture by Red Sox pitcher Curt Schilling. The bonds are only assured payments from the enterprise—the legislature has to appropriate any guarantee payments annually, which they aren’t obligated to do. With their economy still in the tank, it’s understandable that they might have qualms about paying millions of dollars to out-of-state investors.But this is a problem of willingness, not ability. In the end the legislature will appropriate the funds because they need credit to run the State, and Detroit will go through Chapter 9 because the City’s population has been declining since 1950 and is in free-fall now, tumbling 25% in the last decade.Whitney’s famous call was deeply flawed and poorly considered. But even a broken clock can be right once-a-day. Muni bonds aren’t facing a systemic crisis, but now, as always, it pays to be choosy.Douglas R. Tengdin, CFA Chief Investment Officer Hit reply if you have any questions—I read them all!Follow me on Twitter @GlobalMarketUpd
