Defaults Signal Bursting Muni Junk Bubble After Surge

Investors in search of better returns poured $7.8 billion into high-yield municipal bond funds last year, pushing assets to a two-year high. They may start experiencing losses as early as this year as default risks grow.

“People are starving for yield because rates are at zero,” said Paul Tramontano, co-chief executive officer of New York- based Constellation Wealth Advisors, which manages about $4 billion. “They’re taking more risk than they think.”

Below-investment grade munis are typically issued by companies raising debt through a municipality for a project with a public interest such as hospitals, nursing homes, housing developments and sports stadiums, said Eric Jacobson, director of fixed-income research for Morningstar Inc. (more)