Municipal Bond Forum
Perception of risk
Q
We nearly had a default of U.S. obligations because of the choices made by representatives of several states. Given their willingness to allow a U.S. default, is there a default risk premium built into state and local bonds?
A
James A. Klotz responds:
We are not of the opinion that the U.S. nearly defaulted on its debt obligations. The embarrassing scenes we witnessed struck us as more ineffective government leadership playing dangerous political games.
Unlike the federal government, most states and municipalities are required by law to balance their budgets.
Theoretically, all bond investments have the risk of default as a worst-case scenario and, presumably, the likelihood of such an event is incorporated into market participants’ perception of risk.
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