Bloomberg has recently reported that states are looking to foreign buyers for their debt. Hey, if they buy the crud at the federal level, why not the state?
From the article:
“U.S. states are among the cheapest sovereign credits in the world,” said Patrick Brett, a Citigroup banker who marketed the Illinois securities overseas. “You’re actually picking up a good amount of spread for arguably better credits relative to equivalently rated corporates and sovereigns.”
International ownership of U.S. municipal bonds jumped 37 percent in the first half of the year from the end of 2009 to $83 billion, a Sept. 17 Federal Reserve report shows. Spurring the growth are Build America Bonds, created by President Barack Obama’s economic stimulus program to finance public-works projects. More than $140 billion of the debt has been sold in the 17-month-old market. About a quarter may have been bought overseas through June, said Matt Fabian, an analyst with Concord, Massachusetts-based Municipal Market Advisors Inc.
“The more types of investors you have, the better the overall market,” said Fabian, based in Westport, Connecticut.
Before we all go out and buy Cali long-term bonds, let’s also remember these states pension liabilities almost ensure bankruptcy, unless their pension funds somehow return 10% a year every year.
To give an idea how absurd that is, if the Dow managed to return 10% year every year since its 1932 low (so you’re buying at a very good time), it would be at 69,500 right now.
States like California and Illinois will need to default one way or another. Absent rampant inflation, they will either need to default on their bonds, somehow default on their pension liabilities and still pay on their bonds, or get the feederal government to bail them out (and perhaps put the federal government at risk for default).
With more and more foreigners buying municipal bonds, the urge to screw the foreign guy will make simply defaulting on the bonds the easiest path traveled.