Bad News in the Bond Market for States

The market for municipal bonds is showing signs of skittishness, The Wall Street Journal reports. The New Jersey Economic Development Authority cut a bond issue by 40 percent on the news of increasing yields on tax-exempt debt as well as decreased demand. Governor Christie’s state of the state address used the word “bankrupt” to describe the state’s health care costs, a choice of words some are linking to the reduced bond sale. While it may be easy to pin the blame on the b-word, the state is in bad shape where its off-balance sheet debts are concerned, bested only by Illinois.

The yield for 30-year AAA rated General Obligation bonds rose to 5.01 percent yesterday, reflecting higher levels of perceived risk.

This bond-market news comes at a time when governments and public entities are trying to refinance their debts. During the financial crisis many governments brokered debt conversions with variable interest rates. This allowed government borrowers to keep their costs low, temporarily. About $109 billion in such deals expire this year. Governments will have to re-fi at higher rates or get new guarantees.

As the WSJ notes, the problem of a short-term cash crunch is likely more concentrated among smaller borrowers such as hospitals and schools. Most state and municipal borrowers will likely be able to rollover their debts.