Municipalities Struggling In Current Credit Market
While municipal bonds are becoming an increasingly attractive investment, that’s not really good news for the municipalities themselves. Their history of low default rates, much lower than even AAA rated corporate bonds, have not stopped municipal bond yields from soaring, causing many communities to pay millions more in increased borrowing costs.
These increased borrowing costs are causing many state treasurers to bring into question the ratings system which has them paying more than their corporate counterparts. The fact of the matter is though that a government entity is more prone to operate in debt than a corporate entity and thus usually has a lower credit rating. This also means though that any community that is currently running a budget deficit is going to find it increasingly expensive to finance that debt.
The current credit crunch and the troubles of the bond insurance industry have played havoc with their efforts to borrow money and refinance debt. Even big time players in the market like the State of California and the New York Port Authority have had their bond auctions fail due to a lack of bidders. The NYPA has had to raise toll and fare rates to compensate in order to fund their building projects.
The renewed fear of inflation has also helped to drive up interest rates in recent weeks. It may even be the inflation scare that’s most to blame for driving away bidders as investors are starting to flock to inflation hedges such as commodities. Coupled with the fact that the dollar is trading at record lows, it is becoming increasingly obvious that no one wants to be tied to fixed rate securities denominated in dollars no matter how attractive the yield.
