As the entire financial market undergoes fundamental changes, municipals have been sucked into the vortex and the market is experiencing the worst liquidity crisis in 25 years.

Headlines about Arnold Schwarzenegger emailing the Treasury Secretary and asking for a loan of $7 billion because the credit markets are frozen are misleading. The truth is, most of that deal could get done – maybe not at the most advantageous interest rate for the State of California – but it could get done. It’s important to remember that thus far the credit crunch really is referring to the reluctance of major financial entities to lend money to each other and the lack of depth on balance sheets. It does not mean that there will be major defaults in the municipal bond market.

We believe the Financial Markets Rescue Bill will work. This bill, combined with the other extraordinary measures the U.S. Treasury and its foreign counterparts have taken, will begin to have an impact and restore confidence and eventually liquidity to the financial markets. This will take time. Most of the entities designed to help are not up and running yet. Many controls that are in place now as a result of the Great Depression (like FDIC insurance) will prevent the same type of losses experienced then.

Historical default rates in the municipal market are less than 1% and the majority of defaults have come from just a few sectors such as hospital bonds, and industrial revenue bonds which are two sectors we have little or no exposure to. Going forward we will continue to be defensive from a credit perspective and a duration perspective, emphasizing solid credits and intermediate term bonds. We feel that the current situation offers unprecedented opportunity for the long term investor with municipal yields well over Treasury yields and a likelihood of higher tax rates in the future.