A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)
As widely expected the Federal Reserve raised short-term interest rates in December to a range of 1.25% – 1.50%, the highest level for the federal funds rate since the third quarter of 2008. The highlight of the month was the completion of the 2017 Tax Reform and Jobs Act, right before Congress adjourned for the year. Another big, but not so “glitzy”, piece of news was in the municipal bond market. As details of the tax reform bill developed, some significant changes were revealed, creating a rush to the municipal bond market by issuers wanting to get ahead of a December 31 deadline, after which they would not be able to make further issuances. Despite the massive offering, there was more than enough demand for these bonds. This caused spreads to tighten further, creating positive returns for even short-maturity issues. Municipal bonds have become even more attractive in light of the current circumstances, but what does the long-term outlook look like? Government at all levels have been splurging on debt for decades with the last ten years being the worst. The economic crisis shook investor confidence and sent them looking for a government guaranty. The federal government doubled the national debt to $20 trillion in just eight years while states issued additional debt, presumably in proportion to their ability to tax property, sales and other sources of income. Should this concern investors today? Let’s remind ourselves what municipal bonds are for. Government bonds commit future revenues to current needs. When these needs lead to financing public works, infrastructure, and housing among other long-lasting assets, the net effect should be positive, as these investments should give way to economic development and additional income through tax. Bonds issued to cover budget shortfalls, pension plans, social programs and non-governmental facilities, will not have that effect and create undue pressure on future generations. This describes the current situation in Puerto Rico, where the future is now. While investors stateside might think our situation is foreign to them, Bloomberg recently reported that lawmakers in Illinois are so desperate to shore up their underfunded retirement system that they might be willing to borrow $107 billion to ride the financial markets. It would be by far the biggest debt sale in the history of the municipal market, and dwarf Puerto Rico’s debt in one fell swoop. The proposal assumes that the state can make more on its investments than it will pay in interest. A dangerous bet we all know too well on the Island.
by Myrna Rivera, CIMA®
Founder & Chief Executive Officer
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