Displaying items by tag: muni
There is big risk to the muni bond market that you are probably aren’t thinking about. That risk is how increasingly frequent weather-related calamities are befalling US cities as the climate changes. The market is already starting to price these risks, and according to BlackRock, many current muni bond issuers could see 1% knocked of their economic output. According to the head of muni bonds at BNY Mellon, “The risk has been identified by market participants … Looking at the severity of storms picking up . . . it will start to be factored in”. When choosing bonds, investors need to start demanding or checking on plans from issuers. “What plans are they making? Are they hardening their infrastructure . . . are they trying to insulate central services? If they’re just stating the obvious, that’s not sufficient”, says BNY Mellon.
FINSUM: This is an important consideration for all those that hold munis. Think of the weather-related calamities that have happened lately and consider the implications (e.g. Houston).
Any financial advisor will tell you that most of their clients love muni bonds. The asset class has been very popular for many years among the wealthy because of the bonds’ tax exempt status. Therefore, advisors need to pay attention, as there is a little discussed, but very real ticking time bomb in the asset class. That big time bomb is unfunded pension liabilities. The projections made fifteen years ago may have been plausible, but with a financial crisis and then years of rock bottom rates, many think state and local pensions have reached a point of no return which will lead to major defaults. Barclays’ munis team recently noted “We are increasingly wary of high pension exposure, especially among state and local credits”, continuing that “short-term investment gains won’t be sufficient to plug liability gaps”.
FINSUM: There is bound to be a big wave of defaults in the muni space. This is a big and slow-moving crisis that nobody, especially the federal government, wants to deal with.