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Muni Buyers, BEWARE

(Money Magazine) — Cracks are starting to appear in the municipal bond market. If you’re investing for income, it’s time to pay attention.

Consider: Three California cities filed for bankruptcy this summer — unusual in such a short period — and ratings agencies warn that more trouble is coming. “We expect local governments to be struggling with this through 2013,” says Robert Kurtter, managing director, public finance, at Moody’s Investors Service.

Berkshire Hathaway¬†(BRKA,Fortune 500)¬†recently disclosed it was terminating half its contracts that insure against muni bond defaults — a sign, perhaps, that Warren Buffett is increasingly worried about the public sector’s fiscal health.

Policymakers looking to shrink the federal deficit are discussing limits on the tax benefits of munis, normally exempt from federal and, in some cases, state income taxes.


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