Five reasons not to fear municipal bonds
In regards to the article above the author fails to discuss what a rising interest rate will do for cash strapped municipalities and the value of their previously issued bonds. As the author said the economy is improving, and with that, rates will rise. Countries, states and cities that are built upon easy credit will find it more difficult to continue the borrow now for growth tomorrow that has prevailed for nearly 20 years.
As rates continue to rise, values of bonds will fall. A bond's coupon rate is inversely related to its price. So why would someone hold onto a bond paying 3% when they can have one that pays 6%? Many municipalities have grown to comfortable with being able to roll over these debts, which will no longer be done as easily has it has been in the past.
Therefore, states and cities in the most trouble, states such as California and Illinois and cities such as Detroit and Cincinnati, will find their new rates higher than prevailing market rates. The same thing happened to your sub-prime borrowers, and mark my words it will take a government bailout to save "sub-prime" municipalities.
As rates rise we will see even left wing liberals recognizing value in the fact that smaller government is cheaper government and in order to save some services they will have to cut others.
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