Investors Fear Rising Risk of U.S. Regional Defaults
July 6th, 2010

There is a lot of creaking and hull popping on the way to Davy Jones’ Locker.

Via: Financial Times:

Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some eurozone countries.

The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans.

Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the eurozone could now infect the US.

“The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities, who singled out parts of California, as well as towns and cities in Illinois, Michigan and New York state as among the most vulnerable.

“You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market.”

If these market swings are sustained, they could push up borrowing costs for local governments, which, in turn, could exacerbate the squeeze on local authority finances and place more stress on the federal budget.