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Tuesday, January 20, 2009

California Freeze Up: Are Munis Still Safe?

This is a recycling of a previous post, which again becomes relevant given the new issues facing California. CNN reports:

The check isn't in the mail, and it's not going to be for at least 30 days, California will start telling some of its creditors in February.

The state, facing a $42 billion deficit, will delay some crucial payments to stay liquid, state Controller John Chiang announced Friday.

Among those who will be left waiting for checks are thousands of businesses that provide services and products to the state; more than 1 million aged and disabled Californians who need to pay for rent, utilities or food; and individuals and businesses awaiting tax refunds to the tune of $1.91 billion.
While the state has too many issues to discuss in a single post, is California's debt still likely to be paid back? As seen below, the state's general obligation bonds have sold off significantly more than the index in recent months (peaking at the end of December).

Not to worry says Investor Nirav:
They asked the California state treasurer Bill Lockyer whether the California public debt was completely safe. “Absolutely, the only way we’re going to default is if there’s a thermonuclear war.”

So there’s no doubt that California will pay back the debt. In the worst case, the Federal Reserve would just bail the state out. If they’re willing to bail out car companies, I’m sure they’ll step in for California.
I agree... and I'll also agree with the article's obvious finishing comment.
But if there’s more bad news, the yields could go higher still, and the prices of the bonds could fall in value.
In other words, be prepared to face volatility / uncertainty in any investment in the current environment.