Municipal Bonds Yield Higher Than U.S. Treasuries: The Risk of Default

Barron's reports:

TROUBLE IN THE SHORT-TERM MUNICIPAL-BOND market is causing financing headaches for many municipalities around the country, even as their coffers have started to shrink. Any municipality with less than sterling credit potentially faces higher funding costs and less access to credit than last year. Compounding the problem, most municipalities that relied on short-term funding also entered into interest-rate swaps to hedge their interest-rate risk; in the aggregate, they have lost billions of dollars. To refinance would mean closing out the swaps and recognizing the losses -- something no politician is eager to do.

Historically municipal bonds have had lower yields than U.S. Treasuries do to the tax exemption:no more.Compare the two yields curves.The municipal market is implying that it may have a very difficult time paying back principal.