Illinois = Fail, But Not All Munis Suck

How about this:

While most eyes are on the highly leveraged European countries, especially Spain over the past week, back here in the US, Illinois today is close to passing California as the most troubled municipal credit in the country as measured solely by their 5 yr CDS. Illinois 5 yr CDS is up 4 bps today to 295 bps, a record high and up 70 bps in just the past two weeks. California is trading at 299 bps, higher by 2 bps on the day and up about 50 bps in the past two weeks. It does though remain well off its record high of 460 bps back in Dec ‘08. Both municipalities are closing in on Bulgaria at 320 bps, Croatia at 300 bps, Hungary at 318 bps, and Lebanon and Portugal both at 310 bps.

Man, that is some brutal stuff.  If you invest in anything Illinois, you better be getting a great risk premium.  I don’t have those kinds of stones.

But I do have decent sized position in SWFRX.  It is a Municipal Bond fund run by Wells Fargo.   The position has increased in value steadily and I recently doubled down on it.  I started my orginal position in May of ’09.  So what is it?

The investment seeks total return that is exempt from federal and Wisconsin personal income taxes. The fund invests at least 80% of assets in municipal securities that pay interest exempt from federal income tax, including federal alternative minimum tax (AMT), and Wisconsin individual income tax. It invests up to 20% of assets in securities that pay interest subject to federal income tax, including federal AMT. The fund invests up to 10% of assets in below investment-grade municipal securities.

While we don’t have a crushing state income tax like other states, it is still there, and still significant here in Wisco.  This fund gives me exposure to munis without having to worry about one collapsing.  The yield isn’t spectacular (averages around 3%) but it is almost all tax free and is very low risk.  For my bond portfolio it is a great fit for me at this particular time.  The state of Wisconsin isn’t in as terrible shape as some of the others like IL and CA and AZ and MI, but we still have problems.  The good news is that we really didn’t have any manufacturing to speak of before the recession, so we weren’t hurt by that sector collapsing (that all left decades ago) – but the high tech and insurance/brokerage jobs have stayed for the most part in the state.  We don’t have a horrific foreclosure issue either.  I would recommend a fund like this if you live in a relatively strong state and need a place where you want some tax free yield along with very little risk.


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