Muni Bonds Continue to Get Slammed – How Long Will the Bloodbath Continue?

Municipal bonds continue to get taken to the cleaners – here’s an ugly chart for ya:

Muni bonds fall off a cliff. (Source: StockCharts.com)

Ever since the Muni Bond Put known at the Build America Bonds fund was given an expiration date, investors have shown little appetite for tax-free municipal debt.

Mish Shedlock explored the reasons for the muni selloff on his excellent blog:

Reasons for the Muni Selloff

1. Unwinding of the “sure-thing” Quantitative Easing trade
2. Selloff in bonds in general because of budget and inflation concerns
3. End of the Build America Bond program (BABs)
4. Increasing default risk

Of the above reasons, 3 and 4 are the most important on intermediate and ongoing basis.

BABs was excluded from Obama’s compromise tax proposal. Hopefully it stays that way. I discussed why in Time to Kill Build America Bonds (BABs)

The short version is “Taxpayers are already on the hook for hundreds of billions of dollars of Fannie Mae and Freddie Mac debt. We should not extend the insanity to government guarantees of municipal bonds”

However, now that the government guarantee is gone, yields are poised to rise, especially with increased default risk rising.

Mish sees no reason to like munis here. I agree.

And while there could be a short play here, I’d keep a close trailing stop on the upside, because who knows what type of intervention we could see to keep this market propped up.