from Economic Policy Journal:
Although not coming out with a full warning about the municipal bond market, some New York Fed economists come pretty close to warning just that. It’s probably as far as these economists could go without getting fired.
Given this analysis along with the earlier analysis by these economists that (my bold):
….there has been some recovery in the state sector, but we expect that the hangover from the recession will affect both state and local governments and the economy for years to come. Some of the actions taken to address short-term funding needs can increase the severity of the long-term structural challenges that states and localities face, including underfunded pension plans and deficient infrastructure stocks. Until these challenges are successfully resolved, the state and local public sector may continue to be a drag on economic activity in the years ahead.
This is likely to be the closest you are going to get from the Federal Reserve itself that the municipal bond market is a minefield that investors stay away from. What’s most intriguing is that these economists show the graph which displays that 75% of municipal bonds are held either directly or through muni bond funds by individuals. Could they be suggesting that if muni defaults pick up there could be a run out of the muni bond market? As far as I am concerned, reading between the lines, that is exactly what they are saying.