Debt Downgrade: What's The Impact On Municipal Bonds?

The debt downgrade has many people wondering what's next for the economy.

One pressing issue is how that downgrade could trickle down to the local level.

Financial experts say so far the downgrade has had more of an impact on the stock market than on the bond market.

But if that changes, it could affect your bottom line.

"I think the real potential impact comes in the funding that potentially comes from the federal government down to the state or municipalities," said Bill Schultz, chief investment officer for McQueen and Ball of Bethlehem.

Schultz says massive cuts at the federal level could have municipalities scrambling to make up for lost dollars.

That could mean higher property taxes and finding other ways to fund major projects.

"What happened on the national level is not going to trickle down to us yet," said Easton Mayor Sal Panto.

Panto says because the city just had its credit rating increased by Standard and Poors, short term, Easton will have no trouble getting a good interest rate on roughly $9.5 million for two bonds.

Those bonds will be used to partially fund the Intermodal project, refinance old obligations and replace emergency equipment.

But Panto says cities that are having financial troubles might not be as lucky.

"If it's not resolved on the federal level sooner or later and the market doesn't stabilize then I think we are all in trouble," said Panto.

Bottom line, experts say the national downgrade could mean higher interest rates for bonds, leaving some cities and taxpayers paying more and everyone potentially taking a hit down the road.

Schultz says bonds are still very popular with investors but it's more important than ever to do your due diligence.

"It's very important to make sure that underlying entity has the ability to meet the debt service," said Schultz. How can you find that out?

A municipality's credit rating and financial history should be listed on the prospectus and you can also research upcoming obligations by contacting the municipality in question.

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