A number of the country’s larger states face mounting budget pressure as a result of the slow economic recovery, which has caught muni-bond exchange traded funds (ETFs) in a big sell-off.
Moody’s Investor Service stated that U.S. municipal governments will face lower demand for debt and higher borrowing costs, due to a combined budget deficit of $100 billion this year and the extension of Bush-era tax cuts, which lowered the attractiveness of muni’s tax-exempt status, reports Martin Z. Braun for Bloomberg. In December, investors pulled more than $12.5 billion from long-term U.S. muni-bond mutual funds.
The ratings company remarks that none of the states will default but a few might miss payments. In December, Meredith Whitney, a banking analyst, projected that 50 to 100 “significant” muni-bond defaults, valued at “hundreds of billions,” will occur this year. [Despite Meltdown, Some Still Bullish on Muni ETFs.]
A majority of advisors, portfolio managers and economists don’t believe that a slew of defaults will occur but they acknowledge that the probability of defaults has gone up, writes Jessica Toonkel for Investment News. Only $8.2 billion in muni defaults has come to pas in a $2.8 trillion market as of Dec. 10, said MMA managing director Matt Fabian, and only three defaults have occurred this year.