Friday, January 07, 2011

Illinois Munis.

The "x" factor in the state and municipal bond market is this: what will the Federal government do? Will the Federal government run the risk of allowing, say, the state of Illinois to default on its debt obligations? Or will it decide that the risk of contagion in the bond markets outweighs the moral hazard of bailing out the deadbeats in Springfield and Chicago?

The President of the United States is from Illinois, as is his new chief of staff, his former chief of staff, his wife, his chief consigliere, etc, etc. It's an important electoral college anchor in his re-election campaign. As is New Jersey. As is California. As is Michigan, as is New York. Will he risk contagion and allow any of these states to default? Which they almost surely must do without Federal assistance.

Muni bond guys aren't the savviest investors in the world, almost by definition. But they are suddenly among the most important players in American fiscal governance. The Wall Street Journal has a good report on how the muni boys size up the situation in Illinois.