The risk of local municipalities not being able to repay their debt has risen among investors.
Some investors now fear that some local governments are facing problems coping with looming budget deficits, similar to the fate of some eurozone countries, the Financial Times reported.
Investors are eyeing the yields of US municipal bonds since they could signal a contagion of defaults in the eurozone.
“The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities.
Some regions which could be headed for trouble include parts of California and also several cites in New York, Illinois, and Michigan, he said.
“You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market,” Parker said.
Local municipalities could be faced with higher interest rates when they need to borrow money even as they face deficits in their budgets.
“There is more of a perceived risk to munis now,” said Laura LaRosa, director of fixed-income at Glenmede, a private investment manager.
The $100 billion of “Build America bonds,” which have been called “Babs” and mimic corporate bonds, have seen yields increase.
“The problems in the eurozone have driven up fixed-income yields overseas – on banks, utilities and sovereigns. Babs compete directly against those issuers for buyers,” said Matt Fabian, a managing director at Municipal Market Advisors.
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