Municipal bonds have defied Meredith Whitney’s dire forecast made in December of 2010 and have returned 3.7% in 2012 through December 26.
Whitney’s mistake was the fact that bond investors tend to have long investment horizons and thus, the bond market tends to experience lower volatility.
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Half of all US states either returned to peak tax-collection levels before the recession or are close to doing so.
Defaults on local bonds decreased to their lowest levels since 2009 and state coffers have been filling from the higher tax revenues.
State and local debt returned 4.4% last year on a risk-adjusted basis. Price swings on local debt are less pronounced than on other assets.
Investors recognized municipals were the cheapest asset class in 2012. They also took comfort from the asset class’s overall high quality.