Muni-Meltdown

Here at Sound Of Cannons, we forecast this morning that the municipal bond market is facing a double whammy day of reckoning, on the two following dates:

~Dec. 31, 2010: Funding for Build America Bonds runs out. These bonds were part of the “stimulus” bill passed early 2009, subsidizing municipalities’ costs for public works projects to the tune of $150 billion.
~About a quarter of all muni issuance this year has been Build America Bonds. Unless the lame-duck Democrat-controlled Congress moves quickly, this money goes bye-bye in six weeks
~June 30, 2011: Still more federal aid expires on this date -- some of it authorized by the “stimulus” bill, more under the “jobs” bill passed last summer, totaling another $150 billion to date. Without this money, states would have already slashed a host of programs, including unemployment benefits and Medicaid.

The likelihood the new Republican-controlled House will extend this aid ranges between slim and none. We saw Slim at the train station this morning… he’s leaving town.

Days of reckoning are never “fun” per se. Least of all will these be for the savers and retirees who’ve purchased municipal bonds because they’ve been deemed a safe source of tax-free retirement income for, well, ever.The iceberg looming beneath the surface: A host of corporate and state pension plans rely on munis too.