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Another Reason I don’t Like Municipal Bonds

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FOMC Chairman Powell answers a reporter’s question at the press conference.

The Federal Reserve has now become the lender of last resort to the nation’s most mismanaged states and cities. This is just one more reason I don’t like municipal bonds. Heather Gillers and Nick Timiraos report in The Wall Street Journal:

The Federal Reserve said it would again broaden the number of local governments eligible for a new lending program as Illinois announced it would be the first borrower to access the facility.

The central bank said Wednesday it would allow all 50 states to designate two cities or counties to sell debts directly to the central bank’s program, creating an option for states with less populous municipalities to participate. Many state and local governments are facing cash crises as the coronavirus pandemic has crushed both their tax intake and driven an increase in their spending.

The central bank also said state governors will be able to designate an additional two issuers whose revenues are derived from operating activities, such as airports, toll facilities, utilities or public transit, to be eligible to use the facility on their own.

The changes could allow more than 380 issuers, up from around 260 before the latest changes, to access the emergency-lending program, which was first announced in April.

So far, however, few have shown interest in borrowing through the Fed, which has positioned itself as a high-interest lender of last resort.

Illinois becomes the first to tap the program. It is the country’s most indebted state.

Illinois said it would issue $1.2 billion in one-year notes Friday to tide it over until income taxes arrive late in July. The state, which is rated just above junk status, is planning to borrow through the Fed at an interest rate of 3.82%. The rate is more than 10 times what one-year A-rated bonds were going for Wednesday, according to Refinitiv.

“When you can’t get anybody else to lend you money, you’ve got to go to Papa,” said Ben Watkins, director of Florida’s Division of Bond Finance.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com