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Dear Daily Crux reader,  Muni bonds – aka municipal bonds – are a massive disaster waiting to happen… So says the popular financial media and several well-known and outspoken Wall Street analysts. But our colleague Dr. David "Doc" Eifrig, editor of the Retirement Millionaire advisory, says they've got it all wrong. Doc is famous for debunking some of the biggest myths in finance, investing, healthy living, and more… So when he speaks, we always listen. This week, we sat down with him to get the real story on muni bonds. Read on for the details… Good investing,  Justin Brill Managing Editor, The Daily Crux  www.thedailycrux.com

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The Daily Crux Sunday Interview Doc Eifrig: Everything you've heard about this investment could be wrong… The Daily Crux: Doc, ever since popular Wall Street analyst Meredith Whitney went on 60 Minutes in December 2010 and predicted "hundreds of billions of dollars" of defaults in municipal bonds, investors have been terrified of the sector. Yet you say these fears are overblown. Why is that?  Dr. David Eifrig: Well, first let me say I understand why folks are scared… If you listen to most reports, it's completely reasonable to be worried. As you mentioned, on the December 19, 2010 broadcast of 60 Minutes, Meredith Whitney – who became famous for her bearish call on Citigroup in the fall of 2007 – said she was forecasting 50-100 "significant" municipal bond defaults. Because of her perfect call on Citigroup, she became quite popular on Wall Street – even winning awards like Fortune's "50 Most Powerful Women in Business" and CNBC's "Power Player of the Year." So it's not surprising that her muni predication caused a big stir. After that episode aired, $30 billion was pulled out of municipal bond funds in just three months. The biggest muni bond fund is the Vanguard Intermediate-Term Tax-Exempt Fund (VWITX). After Whitney made her claims about massive defaults, VWITX plunged below $13 a share, from close to $14 a share. That may not sound like much, but it's a huge short-term move for a muni bond fund. Investors' fears were stoked again in 2012 with a widely-publicized downgrade from Moody's – one of the big credit ratings agencies – and a number of high-profile municipal bankruptcies. In March 2012, Moody's announced that the default rate for municipal bonds had doubled in the past two years compared to the average default rate from 1970 to 2009. The ratings agency also said it expected more local governments to begin defaulting on bond payments. I don't pay much attention to what ratings agencies like Moody's have to say. After all, they're the same agencies that gave stellar ratings to the worthless mortgage bonds that helped cause the 2008 credit crisis. But the financial media sure does… And the news caused another big rush for the exits in munis. Following that, several municipal defaults made front-page news. In June 2012, Pennsylvania's capital, Harrisburg, declared bankruptcy. The following month, Stockton, California became the largest U.S. city in history to declare bankruptcy. Just one week later, Mammoth Lakes, California filed for bankruptcy protection.  If all you pay attention to are the headlines, you might think Meredith Whitney was finally right. But if you focus on the facts, instead of hype, you'd realize it simply isn't the case… In fact, you could say she couldn't have been more wrong…  In 2011, defaults totaled just $2.6 billion. That's actually less than the $2.8 billion defaults in 2010, the year before she made her call. And despite the high-profile cases in 2012, defaults are on pace to total less than 2011. That's anything but a disaster. Even in 2008 – the worst year for munis in my lifetime – only $8.5 billion defaulted. When you consider the entire muni market weighs in at $3 trillion, that's just a drop in the bucket. ----------Advertisement--------- The greatest creation of wealth…  Thousands of investors have already become millionaires because of these two technologies. If you don't know what they are, you'll want to watch this presentation. I believe this is the biggest opportunity to create wealth in generations. This trend is just beginning. To learn more, click here. --------------------------------- Crux: OK, it's clear in light of those facts that muni bonds aren't even close to a disaster today… But how can you be so sure things won't get much worse from here?  Eifrig: It's simple… Let's start with a quick review of what a muni bond actually is.  For those who don't know, municipal bonds represent promises from local and state governments to pay back money they borrow. That's all they are. In exchange for borrowing money, the local or state government pays the bondholder interest every six months. Plus, it pays the original money – known as the principal – back when the bond matures, which can range from anywhere from two to 30 years. And – one of the best features – the income bondholders receive is exempt from federal income tax and, in many cases, state and local income taxes, too. Because of these features, most of the time, muni bonds are priced as nearly risk-free investments. But these aren't normal times… Many investors are downright scared. And this fear has pushed muni bond prices down – and yields up – to levels that just don't make sense. Normally, muni bonds yield less than the equivalent maturity of U.S. Treasurys. So a 20-year muni bond would yield less than a 20-year Treasury. That makes perfect sense… Assuming the likelihood of default for both bonds is the same, the muni bond that pays tax-free income should pay out less than the Treasury that pays taxable income, because the Treasury has to make up for the tax you're paying. In fact, since 1950, munis have paid a lower interest rate than Treasurys almost 90% of the time. The average difference – or "spread" – between 20-year Treasurys and munis has been around 1.22%. That means munis paid an average 1.22% lower yield than the comparable U.S. Treasury bond. But right now – because of the fear – muni bonds are yielding more than the equivalent yielding Treasurys. For the last couple years, the spread has inverted and averaged a -1.20%. This means investors believe the risk of default to municipal bonds is much higher than it's ever been… even more than during the Vietnam War, the 1987 stock market crash, the '90s savings and loan crisis, or the Internet bubble of 2000. Crux: What are the big fears investors have?  Eifrig: The primary fear is that overall municipal debt – which is around $3 trillion like I mentioned – is far too large to ever pay off, or that the states and localities will not be able to cover the interest payments down the road. But these fears are unfounded for a couple reasons. First, many state and local governments have legal requirements to balance their budgets. That means they're required to face the reality of their fiscal decisions and do what's necessary to meet them. In most places, budgets will be cut before the governments default on their bonds. Local citizens will be forced to take on some of the ancillary responsibilities. We've already seen this in places like San Diego, where private citizens have started caring for the parks and dealing with garbage collection. The most important question regarding default is whether the municipality can cover its interest payments – what's known as "debt service." And when you actually look at the numbers, it turns out that debt service makes up a relatively small part of the average municipality's budget… usually less than 10% in fact. That's hardly a reason to worry. We can also think about the issue a different way. The average cost of interest for municipalities is about 3% a year. Since the total outstanding amount of muni debt is about $3 trillion, that means municipalities have a total yearly interest cost of $90 billion. State tax collections alone are over $700 billion. And tax revenue has climbed for the past eight quarters. More tax revenue means more secure interest payments and lower default risk.  So even if all muni debt were required to be guaranteed by the states – one of the worst case scenarios many pundits talk about – it would account for less than 13% of total revenue… hardly a doomsday scenario. As I mentioned earlier, defaults in 2011 totaled $2.8 billion. That's less than 1% of the total market. Defaults in 2012 are on pace to be similar or even less. Even if defaults doubled from here – the exact scenario predicted by Moody's that caused such a stir earlier this year – it would stillbe less than 1% of the total market… far less than the 10%-14% many of the folks like Meredith Whitney are warning about. In addition, even when municipalities do default, the average recovery rate is nearly 70%. So the risks here are completely overblown… yet many bonds have been trading as if they're actually expecting the 10%-14% default rates under the worst-case scenario. And it's been creating tremendous opportunity for savvy investors. Crux: How do you recommend investors take advantage of this opportunity?  Eifrig: I personally recommend starting with a municipal bond fund that invests in intermediate- to longer-maturity bonds. These pay higher interest rates and tend to have low turnover… meaning the fund managers don't trade for profits or losses. The fund manager buys various bonds from many different sectors, states, and regions, and usually holds them in the fund until maturity, which means less loss-of-principal risk. And owning a fund immediately diversifies your risk from default in any one bond, thus preventing large losses in your portfolio. If you're a little more sophisticated and have a strong interest in your state or your community, you might consider buying individual bonds. But as always, I recommend you hold a basket of them to avoid loss from any one investment. For example, you could buy one bond from your local public school system, one from the toll road, etc. In my Retirement Millionaire advisory, I've recommended several municipal bond funds. One of my favorites is the Invesco Insured Municipal Income Trust (IIM), which I recommended to readers last year. Its turnover is especially low, so the income should be stable for a long time. We're already up more than 30% in just 18 months, but IIM is still rated a strong buy in the portfolio. If any of your readers would like to learn more about municipal bonds – and get access to all my recommendations – I encourage them to consider a subscription to Retirement Millionaire. At just $39 per year, we've made it affordable for everyone to try. Crux: Thanks for talking with us, Doc. Eifrig: My pleasure.

Editor's Note: Doc Eifrig's latest report has nothing to do with muni bonds… But it's one you'll want to see immediately. Doc has uncovered a little-known "loophole" that could allow you to collect real, "hold-in-your-hand" silver coins from your local bank, absolutely free of charge. Anyone can do it… You just have to follow a few simple steps. Click here for the details.