Description – The article discusses about the current status of the U.S. municipal bond market as the aftermath of the Europe debt crisis.
As the budget gaps have been narrowed, investors have become inclined towards the municipal bonds. The Standard & Poor’s Muni Bond index was up and gained almost 3.85 percent up to now this year. iShares S&P National AMT-Free Municipal Bond ETF, traded in NYSE as MUB has also given a considerable rise. The investors are happy with this performance and considering muni bonds as a good contributor to their fixed-income portfolio. Apart from the tax-benefits, the bonds offer other benefits that also lure investors to invest in this.
The knocks on the municipal bonds
Although munis look attractive, yet there are some panics involved in it. The budget deficits as well as the doubtful distinction of U.S. municipal bankruptcy are the key pitfalls, when it comes to investing in muni bonds. Some California cities like Stockton and do Vallejo as well as Harrisburg, Pennsylvania have failed on making debt payments and that surely instill hesitations amongst the bond investors. European debt crisis has contributed a lot in knocking the U.S. municipal bond market. While major European countries such as Greece require trillions of dollars as bailout, it is so obvious that the retail bond investors will be askance about U.S. debt facts. For example, the economy of California, which is at least 6 times bigger than the economy of Greece? Defaults in this state will surely cause panic in the municipal market.
California is not Greece
However, California is not Greece. Not only California, no U.S. state is not like Greece. According to the fixed-income analysts, Greece’s economy has hardly any similarity with the economy of any of the U.S. states. No U.S. government borrows money for funding deficits. In fact, no state can borrow funds for fulfilling deficits over multiple financial years without jumping through several political as well as legal loops. Moreover, U.S. states don’t accumulate debts for operational reasons and the debt-service expenses generally don’t cross 3 percent to 5 percent of the total government expenses.
Downside of U.S. economy
The state governments as well as local governments often slash the budgets whenever there is a revenue deficit. They also raise different taxes including income tax. It becomes a sore for the citizens, for examples, the citizens of California who has just faced such turmoil. And for that reason, the financial experts suggest that every state, except Vermont, should have a balanced budget to avoid facing situations like Greece’s. Such balanced budget would help the municipal bonds investors get paid properly.
U.S. economy – As of now
The good thing is that states are generating revenues with better pace as the budget deficiencies decline. According to the Census Bureau, American states witnessed a growth in the tax revenue generation, as of 2011. In this year, the tax collections rose to almost 765 billion USD. But in 2012, 30 out of 50 American states project a shortfall of 54 billion USD which should be reduced. As per the market strategists, the gap between the earned revenue and deficit has started narrowing down. On the other hand, the gap is increasing in Eurozone countries. Apart from Greece, there are many countries, which managed to remain stable during recession, are now on the threshold.
Revenue generation and Municipal Bond market
With the growth in revenue generation, the muni bond market seems promising to the investors. They keep accumulating profits including tax advantages that ensure that the demand remains strong surpassing the supply.
The state governments as well as the local governments have experienced financial challenges due to the Great Recession and the Europe debt crisis. However, the U.S. states have hardly accumulated excess debt as countries like Greece.
Author’s Bio – Jonny Pean is a financial advisor of easyfinance.com. His writings on finance, investment, insurance etc lure readers.