Fixed-income investors have traditionally taken up municipal bonds and related exchange traded funds to gain exposure to relatively safe, tax free, income-generating debt securities. However, munis still come with their own risks.
Bond ETF investors have looked to muni bond options like iShares National AMT-Free Muni Bond ETF (NYSEArca:MUB), SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca:TFI) and VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSEArca:ITM) to diversify their fixed-income portfolios with a tax-exempt offering that produce relatively attractive yields for investment-grade debt exposure.
However, some shake ups in the munis market have been a cause for concern. For instance, Puerto Rico declared its own form of bankruptcy, and now, Illinois had its bond rating downgraded by both Moody’s and S&P to one notch above junk, and it sports the lowest ranking on record for a U.S. state.
Illinois has gotten to where it is now after failing to implement a budget that addresses the government’s long standing deficits. The state has suffered through underfunded pensions and unpaid bills that equal roughly 40% of its operating budget, according to Madison.
If Illinois fails to shore up its finances and winds up with a speculative-grade debt status, it could drag down the whole market, leaving investors with limited liquidity and exposing many to potential losses.
The state, though, is working fast to rectify the situation. The Illinois Senate overrode Republican Governor Bruce Rauner’s veto of budget bills approved this week by the Democrat-led legislature, moving closer toward an end to the record budget impasses, reports Elizabeth Campbell for Bloomberg.
“We passed a bipartisan balanced budget for the first time in a couple of years,’’ Senate President John Cullerton, a Democrat, said on the floor. “I’m certainly disappointed that he vetoed a balanced budget, but I’m glad that we were able to override him.’’
The Senate approved a $36 billion spending plan and package of tax increases that the House already approved. The S&P Global Ratings and Fitch Ratings both said the measures would mark a shift toward reversing the state’s financial situation, but both warned that a downgrade is still possible without a budget in place.
For more information on the munis market, visit our municipal bonds category.