The local government of Alabama's Jefferson County filed for bankruptcy last week, collapsing under the weight of over $3bn in debt. This marked the biggest municipal bankruptcy in US history, eclipsing the $1.6bn blow up of California's Orange County in 1994.
But while the Jefferson meltdown has hit the headlines, it seems unlikely to reverse this year's impressive rally in municipal debt, reckons Suzanne McGee in The Fiscal Times: the asset class has climbed by 8% as yields have fallen to historic lows. The Jefferson collapse was an isolated case due to "an extraordinary mix of graft and corruption surrounding a particular sewer bond issue".
The big picture has been encouraging. In the first nine months of this year, the number of municipal defaults fell on an annual basis to $949m in a market worth around $3trn as local authorities have slashed spending and raised taxes.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Still, there are "headwinds for the rally in muni debt", says Nicole Bullock in the FT. If Jefferson secures major concession from its creditors, other embattled municipalities may be tempted to file for bankruptcy too. Meanwhile, tax revenues for some states have undershot expectations as the economy has stalled. Forthcoming federal budget cuts could reduce funds for states, with the cuts being passed on to local governments.
-
Going part-time could leave a £58,000 hole in your pension: how to plug the gapThere are many reasons for switching to part-time work, but some savers don’t consider the impact on their pension until it is too late
-
Three bargain investment trusts to add to your portfolioThese three investment trusts are bargains compared to their net asset value (NAV), but one fund analyst thinks the deep discounts are unwarranted.
