Friday, January 14, 2011

City Debt Market Hits Worst Level Since Crisis

As the financial struggles of cities and states become ever more worrisome to investors, the market in their debt has hit its lowest level since the financial crisis, the Wall Street Journal reports.

It's been a dismal few months for local governments. The market in their bonds fell every day this week, the WSJ reports, capping a nine-week stretch of net selling, an indication of investor pessimism. As investors get skittish, and as ratings agencies affix downgraded labels, cities and states will find it increasingly more difficult to resolve their financial woes.

In a sign of local governments' worsening plight, it became even more expensive for them to borrow money Thursday, as yields on 30-year high-rated debt rose to 5.01 percent, the first time that figure has broken five percent since the financial crisis.

Some experts believe a large-scale crisis in the roughly $3 trillion municipal bond market isn't possible, given the long-term nature of local government debt. But a growing group of veteran players says municipal budget strains could plunge the country into another financial crisis. JPMorgan CEO Jamie Dimon this week echoed analyst Meredith Whitney, investor Warren Buffett and others, as he said he expects more cities to declare bankruptcy.

"Be very, very careful," Dimon said, according to Bloomberg.

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