What Happened to the Muni Bond Blowup?

Before turning positive in June, muni bonds funds experienced seven consecutive months of outflows.

By SHARE

Rob Williams, director of fixed-income research at Charles Schwab, says a ratings downgrade of the federal government wouldn't necessarily translate into massive muni defaults. "Most state and local governments' credit quality will stand on their own," Williams says. "I don't think there is a clear connection between the credit quality of state and local governments … and what could happen if there is a change in the U.S. treasury rating." A downgrade would obviously send massive ripples throughout the bond market, but Williams says it could actually boost demand for munis as investors sell treasuries and look for other safe-haven assets.

[See In Pictures: 6 Numbers Every Investor Should Follow.]

Going forward, Sjoblom says, the worst may be over, but investors should still be prepared for more volatility than they've seen in the past. "This is the new environment that we're in after the financial crisis," Sjoblom says. "No one is under any illusions that there isn't credit risk in the muni market. There is credit risk in the muni market."

Twitter: @benbaden