R. B. (Guy) Davidson III

Federal Reserve Chairman Bernanke reiterated today that a healthier economy would prompt the Fed to end its unprecedented bond-buying program, which has kept yields artificially low. Speculation on this question over the last several weeks has caused a sharp bond sell-off and rising yields. But we don’t see this as the start of a rout for most municipal bonds.

Municipal bonds are popular because the interest they pay is exempt from federal taxation. But in its search for solutions to the fiscal cliff, the US federal government is looking under every rock for more revenue sources. This could put muni bonds’ tax-exempt status at risk.

When it comes to eliminating or modifying the tax-exempt status of municipal bonds, everyone seems to have an opinion these days.

When investors see opportunity, we believe they should actively reposition their municipal bond portfolios to take advantage. Often, this requires selling some existing holdings. Today, investors are asking us: Why do you recommend I sell my long-term bonds? They’re yielding 5%. Won’t selling them reduce my potential returns?

On Tuesday, San Bernardino, California, became the third California city in three weeks to announce its intention to seek bankruptcy protection. Does this mark the beginning of a significant trend toward bankruptcy, particularly in California? My colleague Guy Davidson examines the patterns.

The financial failure of Stockton, California, is a sad tale of inflated expectations and poor decision making, but it’s not a harbinger of things to come in the US municipal bond market. Stockton is a unique case, as my colleague Guy Davidson explains below.

The financial crisis of the last four years has damaged the financial conditions of cities and states—and municipal bond insurers. In our view, this has increased the value of research and undermined individual investors’ classic approach to municipal bonds: laddering. My colleague Guy Davidson explains why, below and in the Reuters muniland blog.