Is now the time to buy Muni bonds?
This report was prepared by my firm LPL Financial
The municipal market may soon garner negative headlines if an expected large number of states and municipalities announce budget deficits with the July 1 start of their fiscal year. Municipal bond credit quality may therefore come under question, and investors need to be prepared. Budget strains were expected but are becoming more widespread, and none are more high profile than California’s. Last week, State of California general obligation bonds were placed on credit watch for a potential downgrade by all three major rating agencies, citing the lack of a budget resolution.
- Although news of budget strains may peak over the coming weeks, municipal credit quality questions will likely persist for some time.
- However, the municipal market has historically held up well in response to credit quality challenges.
- Municipal bond investors can take preventative measures but should stay the course and use weakness to add to positions.
The Rockefeller Institute of Government, an independent researcher of state and local governments, reported June 18 that states’ personal income tax collections declined by 26 percent during January to April of 2009 versus the same period in 2008. Among the three sources of state revenues, personal income tax, corporate income tax, and sales tax, personal taxes are typically the biggest share of state revenues. Although states and municipalities do their best to forecast revenue shortfalls, mismatches can occur with budget shortfalls as a result.
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