Main Lines

Sewers may stink. But not when it comes to investing.

There are plenty of municipal bonds out there. States, cities, and school districts all borrow against tax revenues to fund current projects, whether it’s improving a road or building a new school. By borrowing money to build infrastructure, improving economic growth can pay for the bonds’ interest and principal.

Most municipal borrowings bear little credit risk. After all, when the bonds are general obligations of a city or town, they are secured by the general taxing authority. Unlike corporations, cities and towns don’t just “go away,” so credit losses are rare.

Some borrowers aren’t as credit-worthy, however. Both California and Puerto Rico are rated triple-B. Their economies have suffered significantly in the latest downturn. For those issuers, revenue bonds have become much more popular. Early in May, California sold $3 billion in revenue bonds, a billion more than planned. The Puerto Rico Electric Power Authority sold $1 billion in April, $400 million more than intended, as demand for the bonds outstripped the supply.

Investors expect that even if tax revenues fall off, people will keep paying their power and water bills. In general, that’s not a bad bet. After all, the services are essential, and the assets are liquid.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T19:18:22+00:00 June 1st, 2010|Global Market Update|0 Comments

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