Investors and their advisers should be very cautious about purchasing and holding municipal bonds and municipal bond funds, and be mindful of the possible deleterious effects of the fiscal cliff that is rapidly approaching.
States treasurers are concerned that $600 billion in looming automatic federal budget cuts and tax increases threaten their states’ financial health. They say their states stand to lose funding and jobs if Congress allows us go over the fiscal cliff instead of coming to a sustainable and rational agreement on dealing with the national debt.
More than half of the 280,000 public sector jobs lost in 2011 were from state and city administrations, according to the U.S. Department of Commerce (“Fiscal cliff could push some states over the edge,” InvestmentNews).
Thirty six states, including Michigan, California and Connecticut, suffered economic declines in the first half of 2012, with the second quarter decline being worse than the first quarter, according to the article, citing Bloomberg Economic Evaluation of States index. The second quarter 2012 decline was the worst since the third quarter of 2011, when 45 states suffered economic declines.
Seventeen states’ revenues have not returned to January 2008 levels levels. When the revenues are adjusted for inflation, 38 states are below 2008 levels.
Nonetheless, investors in this yield-starved environment continue to buy and hold municipal bonds despite some of the lowest interest rates in 45 years. Given the declining economic health of many municipal bond issuers, many observers think that the low yields are not adequate compensation for the risks.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.