Is It Safe To Buy California Munis?
In my last post, I mentioned that about California was running out of cash. Because of these concerns, yields on California Municipal Bonds are pretty high right now. But is it safe to buy them?
According to the Wall Street Journal, it would appear that it is. They asked the California state treasurer Bill Lockyer whether the California public debt was completely safe. “Absolutely, the only way we’re going to default is if there’s a thermonuclear war.”
David Blair, the head of municipal credit research at bond giant Pimco, agrees. “They clearly have the ability to pay,” he said. But he added that the main risk is headline risk, where bad news smacks prices.
The ten-year Treasurys currently yield about 2.5%. California’s bonds yield about 4.2%. And that’s also exempt from federal income tax.
According to Vanguard’s Mr. Smith, the gap between the two has never been so high. The picture is similar for municipals across the country. Panicked investors have dumped everything – and blindly jumped into Treasurys, driving yields down to incredibly low levels. Meanwhile munis are also under pressure because so many states and cities will have to borrow more.
So there’s no doubt that California will pay back the debt. In the worst case, the Federal Reserve would just bail the state out. If they’re willing to bail out car companies, I’m sure they’ll step in for California.
But if there’s more bad news, the yields could go higher still, and the prices of the bonds could fall in value.
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January 17th, 2009 at 1:31 pm
Do you happen to own any bonds? If so, what are you getting for them?
It seems right now that interest rates are so low, there are not many places one can go to get a decent yield.
Maybe California is going to be the place to go again.
During the great depression that’s where people heading for work…now it’s the place to head for investments…
January 18th, 2009 at 4:06 pm
So, How much did you make in dividends for all of 2008?