Municipal Bond Forum
Perception of risk
Q
We nearly had a default of U.S. obligations because of the choices made by representatives of several states. Given their willingness to allow a U.S. default, is there a default risk premium built into state and local bonds?
A
James A. Klotz responds:
We are not of the opinion that the U.S. nearly defaulted on its debt obligations. The embarrassing scenes we witnessed struck us as more ineffective government leadership playing dangerous political games.
Unlike the federal government, most states and municipalities are required by law to balance their budgets.
Theoretically, all bond investments have the risk of default as a worst-case scenario and, presumably, the likelihood of such an event is incorporated into market participants’ perception of risk.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.