Municipal bond market Buffett-ed

Aug. 21, 2012 at 12:55 PM
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NEW YORK, Aug. 21 (UPI) -- Market analysts said Berkshire Hathaway's early exit on a portion of its municipal bond market holdings could be a signal market risk is rising.

The Wall Street Journal reported Tuesday the investment firm run by billionaire investor Warren Buffett has terminated its bets on $8.5 billion in municipal debt.

In a deal with Lehman Bros., the firm bet the municipalities involved would not default on their bond obligations, as Berkshire Hathaway would have had to pay the difference if they had.

Buffett most likely "doesn't want this exposure anymore and is getting out while he can," Jeff Matthews, a hedge-fund manager who owns Berkshire Hathaway stock, told the Journal.

Another stockholder, David Kass, a professor at the University of Maryland's Robert H. Smith School of Business, also said Buffett may believe the risks of insuring municipal debt have risen.

On the other hand, Buffett is a shrewd investor well versed in strategies of when to buy and when to sell.

Demand for municipal bonds is strong. California sold $10 billion in short-term bonds last Thursday, which sent yields down to 0.33 percent and 0.43 percent on one-year bonds.

Still, three cities in California have filed for Chapter 9 bankruptcy protection, and other large cities, including Detroit, are in dire financial straits.

"There is a need for concern. Many of these municipal leaders appear ready to sacrifice bondholders on the altar of the taxpayers rather than the other way around, which has historically been the case," said Bill Brandt, chairman of the Illinois Finance Authority and chief executive officer of Development Specialists Inc., a consulting firm specializing in municipal finances.

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