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Municipal Bonds Crushed by QE2

mub

I am in the middle of writing my year-end newsletter, and part of it discusses unintended consequences. Well, looking at this chart of the municipal bond etf index fund I think we can easily spot one unintended consequence of the Federal Reserve’s latest foray into monetary easing: a 5% drop in the value of municipal bonds.

The bond market has been moving in exactly the opposite direction from the intended results of the Fed’s actions. They intended for yields to drop giving a stimulative effect to the economy. The bond market seems to be saying something completely different – it seems to be saying that more monetary stimulus will be inflationary and is taking a preemptive swing a bond holders. Muni bond holders seem to have taken the brunt of the initial swing, but other areas will likely see similar if not bigger negative moves – I’m thinking the high yield sector is likely vulnerable although on the chart below you can see that it hasn’t been impacted as much yet.

phb

I’ve been away from the blog for a couple of weeks (for good reasons – I was in Honduras with the Rotary Club visiting the Children’s Home we sponsor and helped construct – you can check out the photos at my other website if you have an interest in such charitable work by following this link: Photo Link – Honduras Children\'s Home Visit – and last week was my board meeting week) plus I’ve been working on the newsletter which takes countless hours to produce.

However, things should be all right now and the posts should be more regular.

Mark