Investors Still Fearful About Municipal Bond Market Collapse

The municipal bond market is nowhere near as bad as it was few years ago. That doesn't mean the muni market is free of risks and challenges for financial advisers building bond portfolios for clients writes Jeff Benjamin in a May, 2012, article from InvestmentNews.com.

George Friedlander, managing director and chief municipal strategist with Citi Investment Research & Analysis said, 'Investors know the market has changed and there's a real challenge for advisers working with individual investors."

Friedlander cautioned that the typical muni bond investors believes he or she has too much duration risk, but in fact could have too little.

Benjamin writes that Mr. Friedlander attributed the "sharp outflows" from muni bond funds over the last two years to many of the predictions that the muni market was on the brink of widespread collapse. And he acknowledged that "we do have more defaults to deal with. But not the kind of magnitude that scared people out of muni funds in 2010."

The fear among individual investors is noted by the $347 billion worth of redemptions last year, against $295 billion in new muni bond issuance. In 2012, Friedlander is expecting issuance to reach $350 billion. However, is concerned about the level of fear among individual investors.

"Individual investor demand has been just okay, because they are resistant to the lower rates," he said. "Whenever there's a reduction in rates individuals go into rate shock, and that is purely an individual investor mindset because institutional investors will consider whether rates are going up — not whether or not rates used to be higher."