How Safe is the Municipal Bond Market?
Question: When states like California are struggling with their fiscal budgets, how safe is the municipal bond market?
Paul Solman: Not as safe as it used to be. Not nearly. You can see that reflected, to some extent, in the price “municipalities” have to pay to borrow money in the bond market. Consider the Pajaro/Sunny Mesa Community Service District, north of Monterey, Calif. It is paying close to 6 percent on its 10-year bonds, and they’re TAX-EXEMPT. So the equivalent yield, compared to a TAXABLE U.S. bond, could be as high as 9 percent, depending on your tax bracket.
But even if there are details about Pajaro that I’m missing (always a possibility), the general point is clear: When investors wonder if they’re going to be paid back, they demand a higher interest rate.
When you project ahead for a state like California in terms of its ability to pay back, the picture seems mighty bleak. Unless the U.S. government comes to the rescue — and how likely is THAT? — the state faces seemingly insurmountable debts and apparently intransigent taxpayers. Something’s gotta give. Mightn’t that be the bonds?