A federal judge earlier this week gave the green light to Stockton, Calif. to restructure under bankruptcy protection despite protests from creditors. The Wall Street Journal reports the judge signaled that Stockton may have to cut payments to its pension fund, which could set a precedent for other cities. The fight also has pitted California’s pension system, CalPERs, against other bondholders and the Wall Street firms that insure them.
Municipal bonds are issued by cities and states to help finance infrastructure projects. They're popular with investors in part because of their tax-exempt status. What does Stockton’s situation mean for the muni market?
“This really hasn’t happened before,” Matt Fabian, managing director of the Massachusetts-based Municipal Market Advisors, tells The Daily Ticker. “We are further along the road toward some potential haircut for bondholders. In all the bankruptcies that have happened in modern history, there haven’t been any haircuts for regular government bondholders – in general people have always gotten their principal back.”
Bankruptcies aren’t the only concern for the muni market. According to CNBC, $500 million flowed out of municipal bond funds in March. While it’s a small portion of the $608 billion asset class, it’s enough of an exodus to have some wondering if investors are beginning to worry about fixed income.
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