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Marc Joffe is the founder of Public Sector Credit Solutions (PSCS) which applies open data and analytics to rating government bonds. Before starting PSCS, Marc was a Senior Director at Moody’s Analytics. You can contact him at firstname.lastname@example.org. Marc is also one of the winners of Sunlight Foundation’s OpenGov Grants.
High profile bankruptcy filings by Detroit and other cities, along with concerns about public employee pensions, are increasing borrowing costs for state and local governments. Higher interest payments to bondholders mean higher taxes and fewer services. However, with transparent data and analytics, local government bonds can get reasonable interest rates -- as this post will illustrate.
Over the last 70 years, municipal bond defaults have been rare. In a typical year, no more than one in 1,000 municipalities fail to make timely payments on their tax supported debt. Also, interest on municipal bonds is exempt from federal income taxes and usually free of state income taxes as well.
Because of their low risk and favorable tax treatment, municipal bonds have typically yielded less than US Treasury bonds – making it easy for states, cities, counties and school districts to finance new infrastructure. Time series data available from the Federal Reserve (a portion of which is depicted in the accompanying graph) show that yields on “munis” were lower than Treasuries from 1953 until the 2008 financial crisis. This discount returned briefly in 2010, but since Meredith Whitney predicted a wave of municipal bond defaults on 60 Minutes in December 2010, muni yields have exceeded Treasury yields – often by substantial margins.Municipal and Treasury data Continue reading