U.S. States, Cities Seek Voter Approval for $17 Billion of Debt

States and municipalities across the country are asking voters to approve $16.8 billion in bonds this upcoming election on November 2nd. According to Business Week.com, this represents the lowest amount during a congressional year general election since 1996. Check out a snippet of their story below.

U.S. states and municipalities from Maryland to Alaska will ask voters to approve $16.8 billion in bonds Nov. 2, the lowest general-election amount in a congressional year since 1996, Ipreo Holdings LLC data show.

Lawmakers in Alaska seek to issue $997 million of bonds, the most of any ballot question this year, to fund mortgages for veterans, while voters in Washington state will consider $505 million for energy projects at schools, according to New York- based Ipreo, a market-research company. Issuers asked for authority to borrow almost $67 billion in the general election two years ago and $79 billion in 2006, the largest amounts since 1946, according to data compiled by Thomson Reuters.

In 1996, voters considered $16.6 billion in bonding authorizations, Thomson Reuters data show. General-election ballots typically contain more debt in even years, when congressional elections are held, than in odd-numbered ones. In 2009, governments sought approval for $9.8 billion.

“The public is getting nervous about all the debt being accumulated in this country,” said John Matsusaka, president of the Initiative & Referendum Institute at the University of Southern California in Los Angeles. “The appetite has been diminished.”

The $67 billion sought two years ago was driven by California, which isn’t putting any statewide bond questions before voters on Nov. 2.

Continue reading at Business Week.com…

'Junk' Bonds Hit Record

From the Wall Street Journal:

U.S. companies issued risky "junk" bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

Corporate borrowers with less than investment-grade ratings sold $15.4 billion in junk bonds this week, a record total for a single week, according to data provider Dealogic. The month-to-date total, $21.1 billion, is especially high for August, typically a quiet month that has seen an average of just $6.5 billion in issuance over the past decade.

For the year, the volume of U.S. junk bonds has exceeded $155 billion, 80% higher than in the year-ago period and easily on pace to surpass the record $163.6 billion total for 2009.

Bonds: Avoid the next great bubble

“Fueled by a combination of fear and greed. ” That is how CNNMoney.com describes the bond market bubble. According to CNNMoney.com:

A projected $380 billion will pour into bond funds this year, more than went into domestic stock funds in the past decade. That's on top of a record $376 billion last year. All this money flowing in has made bonds very expensive.

It's true that bonds are less volatile than stocks. But in fact they lose money just as often as equities do. "I don't think the public understands they can lose money in bond funds," says James Swanson, chief investment strategist at MFS, an asset-management firm in Boston.

So that's the fear part. The greed part comes from an entirely different group of people: safety-loving folks who normally park their money in cash, such as bank savings accounts, CDs, or money-market funds. Fed up with the meager interest rates those accounts are paying these days -- the average taxable money-market fund yields 0.03% -- they're venturing into short-term bond funds to eke out a bit more yield.

Why the bubble could burst

One part of the bubble is already leaking air: long-term government bond funds. Because they invest in super-safe U.S. Treasuries and other forms of government-backed debt, they were a popular place to hide during the mortgage meltdown.

But when the economy began improving and rates on 10-year Treasuries began rising (from about 2% at the end of 2008 to as high as 4% in April before slipping to 3.3% today), these funds started suffering. In fact, the Vanguard long-term Treasury bond fund fell 12% in 2009 and, despite the recent run up in Treasury securities, is still down 5% since the end of 2008.

Experts say that's just the beginning. Read about the major factors that could harm bonds further here.

Fundline: Tax-Free Bonds Out-Yield Taxable Bonds

From USAToday.com:

In the normal course of events, tax-free municipal bonds usually yield less than taxable bonds. But the financial world is turned upside down, and non-taxable bonds now offer tastier yields.

All bonds are interest-paying IOUs, and the amount of interest they pay depends, in large part, on their creditworthiness. An issuer teetering on the edge of bankruptcy will pay far more interest than the U.S. Treasury, which can raise taxes or even print money in a pinch.

Cities, states, towns and other municipal entities issue bonds to pay for schools, roads and other projects. The interest these bonds pay is exempt from federal tax — and state tax, too, for bondholders who live in the issuing state.

Because munis have a big tax advantage, they almost always yield less than taxable bonds, such as Treasury securities. Someone in the 33% tax bracket, for example, would have to earn 3.8% in a taxable bond to get the same after-tax return as a 2.6% tax-free bond. (If you want to calculate a muni bond's taxable-equivalent yield, www.investinginbonds.com has a calculator.)

But the global financial crisis has sent investors scrambling into ultrasafe Treasury securities, pushing yields down. A 10-year T-note, for example, yielded just 2.90% Friday. A 10-year, highly rated municipal bond yielded 3.44%.

Why? Big investors haven't scrambled to munis, in part because most institutional investors don't give a hoot about taxes. Munis aren't backed by the full faith and credit of the U.S. Treasury, meaning there's a chance a muni bond could default.

But states and towns can raise taxes to meet debts, and muni bond defaults are extremely rare. If you're looking for high yields and low taxes, munis look like one of the best deals out there.