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Municipalities’ Inability to Pay Bond Interest Places Investors in a Precarious Position

Seeking Greater Yield and Safety, Muni Bond Customers Encounter Defaults 

Despite the fact that the coronavirus has taken a toll on city and state finances, this isn’t stopping investors from buying municipal debt in a bid for greater yield and more safety than the markets can provide at this time. Unfortunately, because many municipalities don’t have the money to pay interest on the bonds, these muni bonds are defaulting. This is bad news for investors. 

If you suffered losses from the municipal bonds that your broker recommended to you, you may have grounds for an investor claim to recover your losses. Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorlawyers.com) represents municipal bond fraud investors nationwide. We can help you explore your legal options. 

COVID-19, Municipality Defaults Tighten Budgets 

Shutdowns all over the United States and record unemployment from COVID-19 were already causing turmoil in the municipal bond market. Then, as of the end of July, at least 50 municipality borrowers have defaulted. 

According to The Wall Street Journal, Municipal Market Analytics data show that this was the highest number of defaults by muni borrowers since 2011 when many of them were still recovering from the 2008 financial crisis. 

Also, municipal borrowers have been overwhelmed with a drop in their typical avenues of revenue, including airport fees, hotel and income taxes, and other sources. Yet none of this has kept investors in muni bonds, who had initially run away scared at the start of the pandemic, from coming back. 

A few months back, financial services company Refinitiv Lipper reported that since the end of April, investors had restored approximately $28B to muni mutual funds. 

Yet, according to the WSJ, municipal bond yields have been at their lowest since 1982. This is in light of a significant increase in bond prices even with so many municipal bonds defaulting. Last month, research note analysts from Barclays Plc predicted that high-yield muni default rates are expected to go up in the next few years. 

Marketing of Municipal Bonds May Not Be Suitable for All Investors

This doesn’t bode well for investors. As such, broker-dealers and investment advisors should be exercising caution when recommending or selling municipal bonds to their customers, especially if it is an investor looking for yields and safety where there may be none. Marketing muni bonds at this time may be unsuitable for many retail investors, retirees, conservative investors and others. 

To schedule your free case consultation contact our broker fraud attorneys at SSEK Law Firm at (800) 259-9010 or by using our online contact form.

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