The bond revenue squeeze

Back in February 2011, Elizabeth Keller, president and CEO of the nonprofit Center for State and Local Government Excellence, blamed fear-mongering by both Congress and media-hungry financial analysts for inciting investors to pull billions of dollars out of the bond market, which, in turn, caused municipal bond issue rates to rise to 5.09%. “That means … well-managed governments either wait to build the schools, bridges, and roads their communities need, or they pay higher rates than they should for low-risk bonds,” she says.

Although 30-year-yield interest rates are back in the 3% range, the muni bond market now faces another nemesis. Federal sequestration will reduce government spending by $85 billion this year and by $1.2 billion over a decade. These cuts will also reduce “direct-pay bond” subsidies, which can undoubtedly decrease municipal bond market values — and may once again drive investors away.

In essence, Keller’s advice remains timely: With scarce resources, we need to focus on what’s most important and figure out how to make it happen. That will require a “public-private-people partnership like the World War II generation experienced,” whereas citizens are asked to roll up their sleeves and contribute their time, money, and expertise for the public good.