One asset class that has shown no signs of emerging from the economic downturn has been the once rock-solid municipal bond. State and local governments were very hard-hit by the recession, seeing their tax bases erode and laying off thousands of workers, which has left the market skeptical of their ability to repay their bonds. Over just the past four months, some $38 billion has flowed out of the muni bond market, or 7 percent of all the money once held there.
How much risk is there in municipal bonds? At the moment, the default rates are still pretty low. The entire municipal bond market is worth nearly $3 trillion, while bonds that are now in default constitute about $8 billion worth. That means about 0.3 percent of the market is in default.
On the other hand, the consulting firm headed by Nouriel Roubini - the economist called Dr. Doom who predicted the Great Recession - sees a wave of municipal defaults headed our way. Roubini has forecast as much as another $100 billion in defaulted bond issues. It's true that other economists think that figure may be way too high, but it's an opinion worth keeping in mind.
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