While the debate about the safety of municipal bonds rages, the actual creditworthiness of major states, cities, and local governments continues to falter.
This week, the state of Illinois had its credit rating downgraded by Standard & Poor’s from A+ to A. According to the numbers, Illinois has an unfunded pension liability that could top $93 billion by mid-2013. (VIDEO: Municipal Bonds: Myth vs. Reality)
National muni bond ETFs (NYSE:MUB) and even certain state focused funds like California (NYSE:CMF) and New York (NYSE:NYF) have yet to show any signs of stress. All three muni bond ETFs are trading above both their 50 and 200 SMA. The $3.7 trillion municipal bond market has been calm, but that doesn’t mean it’s safe.
The Federal Reserve Bank of New York conducted a study showing how major credit rating agencies like Moody’s (NYSE:MCO) and Standard & Poor’s have been understating historical default rates within the muni marketplace. The September edition of the ETF Profit Strategy Newsletter covers this along with an trading strategy for what’s ahead.