Fears of a massive wave of municipal bond defaults have given rise to a new question: how can investors profit if a nightmare meltdown scenario becomes reality?
The once boring muni bond market has become a hotbed of controversy. Huge public pension liabilities, declining tax revenues, and ballooning budget deficits have created financial challenges for states, cities and towns across America.
Meredith Whitney has famously announced that many muni-bonds are too risky for the meager returns they offer. Jim Chanos backed her up on "Squawk Box" today, arguing that many states are basically insolvent. Others, including some prominent muni-bond experts, have said that these fears are over-stated.
Investors are dividing on the question. Many hedge funds have started looking for bargains in muni bonds, searching for debt that might have been beaten down too far. Some are betting that the federal government will step in to rescue the muni debt market if the stress becomes too extreme.
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