California Muni Bonds

I have been a muni bond bull for a while now, in spite of the tumbling muni markets.  Here’s some commentary on the situation in California in today’s WSJ.  Note that munis have been rallying over the past few weeks.

Investors are getting used to thinking the unthinkable. From Fannie Mae to Washington Mutual to Bernie Madoff, the impossible — even the surreal — has become the new normal.

Yet even by current standards, the fiscal crisis engulfing California looks especially alarming. State revenues have collapsed. Sacramento is paralysed. Some infrastructure projects were put on hold last month. The state comptroller warns he may soon have to start paying bills with IOUs.

No wonder California’s bond rating is the lowest of any state. The “general obligation” (or full faith and credit) bonds now yield about three times as much, on one key measure, as equivalent Treasurys. In most markets that would be considered a sign of extreme distress.

Nervous times all round.

I know it seems crazy. But this week, when I spoke to California state treasurer Bill Lockyer, I had to ask: Is California public debt completely safe?

Absolutely, he replied. “The only way we’re going to default is if there’s a thermonuclear war.”

Well, it doesn’t get more emphatic than that. Mr. Lockyer calls it a “certainty” that California will pay all its debts, and on time.


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