As Bloomberg reports, “AAA municipal general obligation bonds due in two years get a yield equal to 119 percent of similar- maturity Treasuries”. There are a few reasons that municipal securities as a whole are being thrown by the wayside:
1) The Budget Crises in states such as Illinois and California are overwhelming any bond issuance from more healthy states and municipalities
2) The federally supported Build America Bonds (BABS) program is set to expire soon without any further help from Congress
3) A large amount of issuance to sort out current budgets is overwhelming the market
4) Municipalities are being compared to the European Sovereign crisis
I believe that all of these issues will sort themselves out in the next few years and we will look at the current market as an anomalous opportunity. Sure, certain municipalities will default and certain states will hit crisis mode before things get better, but with all over-reacting markets it seems that the baby almost always gets thrown out with the bathwater. Taxing authority is very powerful and the budget dilemmas of the states are not nearly as dire as those of certain European countries.