I had spent many years working in the Bond Markets, and Tax-Free Municipal Bonds were always regarded as being second in quality only to U. S. Treasury obligations. Obviously, both have come under scrutiny due to the Budget Stand-Off in Washington. “Munis”, issued by State and Local Governments, were always considered safe since they had sole taxing authority within their respective purviews.
Over the years, many people have counted on that assumed security, and the tax-free characteristic of the income received (but, not any capital gains) of these issues. But, as we get closer to a point when (assumedly next Thursday, October 17th) the U.S. Treasury might not be able to pay its bills, the safety of munis might need to be second-guessed. Now, I’m not suggesting that the U.S. Treasury will enter default; but, it’s better to be aware of the potential impact, and make some adjustments, if you wish.
Munis are perhaps the most-segmented of all bond markets, which means that their negotiability is not as good as other types of bonds. When the Treasury or IBM (let’s say) enter the Bond Market, they might issue Billions of Dollars in any one issue. State and Local Governments, however, tend to spread the maturities of a specific issue over a number of years (“serials”), and perhaps have a balloon (“term”) payment at the end. So, where the Treasury or a large Corporation would have a huge issue, with all bonds having the same maturity and “coupon” (annual interest due), munis spread the issues out (numerous maturities and interest rates). That segmentation reduces the secondary marketability–negotiability. So, don’t consider even short-term bonds offered by (let’s say) your local school district as your “liquid” money. Keep your liquidity in Cash.
Also, if the Treasury were to fail to pay its bills, then we can look at the Great Recession (2007-2009), and its aftermath, for an indication of one more part of what could happen. The states cannot run a deficit. So, as part of the Stimulus that President Barack Obama got Congress to begrudgingly pass, he offered money to each of the states. I recall that, at one point, California was paying its bills with IOUs (even wages). Well, in the case of a default by the U.S. Treasury, and the potential return to Armageddon that that could bring, the states would certainly be on their own. No hand-outs!
Now, I really do not believe that the Treasury will default; however, we might see another credit rating agency lower the bond rating from, let’s say, AAA to AA+; but, the credit markets are certainly taking all this Beltway Insanity into account. My purpose, however, in this Blog Post is to make a couple of facts know that I certainly haven’t seen in either the Press or Broadcast Media.
Recently, some of the Big Businesses that traditionally support the Republican Party, and the Big Money that has been financing the Tea Party, have backed-away from the Defund-Obamacaree Bandwagon. Also, I believe that there are others on the “Right” who are realizing the Nonsense in merely extending the Debt Limit for six weeks, or so. That would merely push the Problem into the middle of the Holiday Retail Shopping Season. Oftentimes, that’s a Year-End indicator for the following year’s Economy.
NOTE: I believe that we need to take special precautions at this time. Back during the Great Recession, when the Dow Jones Industrial Average fluctuated some 1,000 to 1,200 points, during any given day, I told my investment clients to carry a small leather case, with a Rosary, a Mezuzah, a Koran, Greek Worry Beads and a little statue of Buddha. Weird? But, it got us through it! Only kidding.