"This downturn, even more so than previous downturns, really is affecting every state right now," said Brian Sigritz, a staff associate with the National Association of State Budget Officers.
The Washington-based organization says 42 states wrestled with budget deficits this spring, the most since it began tracking budgets 30 years ago.
This means that any state unable to balance its budget is in serious risk of a credit ratings downgrade. Higher repayment risk hurts bond values! Second, the sheer volume of Treasury debt being issued will eventually push interest rates up for any kind of debt. The crowding-out effect was only thought to affect corporate debt, but now we're seeing its effects on mortgages and other forms of debt:
Billionaire investor George Soros on Tuesday predicted a “stop-go” economy for the United States, saying fears of inflation will drive up interest rates and choke off growth, Reuters reported.
(snip)
Rising U.S. Treasury yields have driven mortgage rates back up, threatening a recovery in the housing market and a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them.
You tell 'em, George. Rising interest rates lower the value of outstanding bonds and will blow an even bigger hole in state budgets as the cost of servicing new debt rises. Muni bond holders are set to get hit by a double whammy in the near future.
Nota bene: Anthony J. Alfidi does not own any muni bonds at this time.
