SEC Member Predicts 'Armageddon' for Municipal Bonds

NEW YORK (MainStreet) —A perfect storm in the muni bond market is brewing, according to Securities and Exchange Commission member Daniel M. Gallagher. In fact, the specter of rising interest rates combined with recent and looming California municipal bankruptcies might create the perfect storm. “We’ve got Armageddon on our hands,” Gallagher said.

Gallagher’s comments came during an SEC-sponsored fixed income round-table discussion last week. His comments startled industry observers, but since his dire proclamation, he hasn’t backed down. In fact, he is pushing the panic button even harder.

“I made the comment in the context of credit risk plus interest rate risk being two major factors that maybe investors don't fully understand,” Investment News quoted Gallagher as saying. “The population of investors in this space means we have to double down on investor education.”

The nearly $4 trillion muni market, primarily comprised of individual investors, has rarely seen defaults or bankruptcies, but Gallagher doesn’t lend much confidence to the market in that regard.

“Defaults are certainly the more remote scenario — we hope,” Gallagher said in the Investment News report. “I definitely think interest rate risk for investors who will sell before the bonds mature is a big deal.”

He worries that investors – many of them senior citizens with limited financial resources – will see the value of their muni bonds plunge.

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