Washington : The $2.8 trillion (Dh10.27 trillion) municipal bond market is a bubble about to burst, as housing and technology did in the past 10 years, said Michael Aronstein, the money manager whose Marketfield Fund returned 31 per cent in 2009 by betting correctly on commodity-price swings.
Lulled by ready access to low-cost credit, politicians have piled up unsustainable debt service that the public will soon demand they stop paying, he said.
Bankers are selling municipal bonds based on unrealistic assumptions of population and revenue, and will be held accountable when they can't be repaid, he said in an interview. Aronstein also saw weakness in emerging markets such as China and India, which have been saturated by years of investment and will be harmed as investors return funds to the US to capitalise on a strengthening dollar.
"I think we're getting quite close," he said of the collapse of the municipal market.
"You'll see people trying to withdraw money from the municipal bond funds. The big risk comes when you start seeing the tightening credit cycle."
Aronstein, who manages the $102 million Marketfield Fund and is chief investment strategist at Oscar Gruss & Son Inc. in New York, recommended buying credit default swaps on debt issued by California, the US's lowest-rated state. He said investments in so-called BRIC Index funds, funds based on returns from Brazil, Russia, India and China, will prove costly because the opportunities for realising gains in emerging markets have passed.
