The $2.7 tn US municipal-bond
market is a sleepy corner of the
fixed-income world, operated by local town, city and state
governments. Municipal bonds, also known as
`muni', are very attractive among investor community because the interest-income
is generally exempt from government taxes and also they have a
reputation for safety. Tax-exempt municipal bonds were considered conservative and
dependable. However, it is no longer the case, as overspending and the
hollowing out of the revenue base are affecting
cities and states everywhere in the US. Many State and Local (S&L)
governments are running huge deficits and some of them have set aside
non-critical services, while states like New York and California have raised taxes,
a nasty decision during economic recession. Indeed, public finance continues
to face challenges from multiple blows, including rigid lending practices and
the demise of many bond insurances which guaranteed about half of the muni
market a year ago. More importantly, the lack of cheap insurance has left
many S&L unable to raise debt.
Credit rating agency Moody's now suspects all muni to be shaky and
has kept a negative outlook, going by the creditworthiness of the local
government system. Its report on municipalities offers a note of caution to
municipal bond investors who have been seeking a safe stream of income in the
wake of financial markets meltdown. In Moody's 100-year history, for the
first time ever that such a downgrade of the US local government system, in
the light of the 17-month-old national recession and the combined bust in
the financial and housing markets, has taken place. In the past, it used to
rate muni individually, as they are too diverse to make a blanket
statement about.
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