Have Municipal Bonds Become High Risk Securities?
The $2.8 trillion municipal bond market, long considered one of the safest havens for investors, is actually fraught with risk, according to a recent CNBC article titled “More Cities on Brink of Bankruptcy.”
Cities from Los Angeles to New York are struggling with daunting levels of debt, lower tax revenues, and high labor costs. It is easy to say that cities can always raise taxes to counter a budget shortfall, but the politics of raising taxes in a recession makes that solution problematic at best.
The default rate on municipal bonds has historically been less than 1 percent versus almost 13 percent for corporate bonds. For that reason, some brokers have been encouraging investors to invest their “safe money” in municipal bonds. But credit default swaps, which pay out if an entity defaults, tell a different story.
The Markit MCDX index that tracks the cost of insuring against default of a basket of 50 municipalities is at a high point, meaning that at a record number of market participants believe that the risk of municipal defaults is at a high point.
The article focuses on a possible bankruptcy filing by the city of Harrisburg, the state capital of Pennsylvania, population 55,000. Harrisburg, owes nearly $70 million, does not have the funds to meet its obligations, has one of the lowest credit ratings of any municipality in the United States, and, on May 1, failed to make a $452,282 loan payment.
A Harrisburg bankruptcy could be the first in a fresh series, according to some Wall Street traders. Municipal bankruptcies have already occurred, however. The city of Vallejo, Calif., has reportedly been in bankruptcy since 2008.
Jim Lebenthal, head of public affairs for municipal-bond underwriter, Lebenthal & Co., said that the Harrisburg situation is "emblematic" of the larger economic struggles that cities face right now. "If it can happen in a state capital, my God, it can happen anywhere," said Lebenthal.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. Page Perry’s attorneys are actively involved in counseling institutional and individual investors involving municipal securities. For further information, please contact us.
