Tuesday, October 28, 2008

The Debts of the Spenders: Record Budget Deficits Will Force Higher Muni Bond Yields

Record state and city deficits are forcing local governments to offer higher yields on their bonds. Most local budgets are funded by real estate taxes. In large cities like NYC and Chicago, tax revenues are also funded by financial institutions. I don't need to remind you of the parlous state of those two revenue streams.

Additionally, foreign investors are fleeing to US govt debt which includes both federal (treasuries) and local (munis). Traditionally wealthy individuals also preferred munis because of their tax free status.

Some of the upwards yield pressure will be mitigated by this demand. States will also continue to petition the Federal government for more handouts. However, the near bankrupt state of many local budgets WILL see increased capital flows into the US.

So, what does all this mean? More dollar strength. At the moment, most of the world's money is all pouring into either the USA or Japan.


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