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What Should I Know About State of CT Municipal Bonds and the Current Budget Situation?

Posted by Team HFM on June 02, 2016

In mid to late May, credit rating agencies Standard & Poor’s and Fitch both downgraded the state of Connecticut’s general obligation (GO) ratings one level to ‘AA-‘, on par with Moody’s Aa3 GO rating. Given the state’s ongoing budgetary problems, the downgrades were not unexpected.

Moody’s Investor Service commented last quarter that “While (they) expect the state to solve the budgetary gaps with recurring solutions, (they) believe that the weakening demographics will continue and place negative pressure on the state’s economy and finances in the next few years, while the very high fixed costs reduce flexibility and present additional challenges.”

The good news is, we are not Puerto Rico.  Not yet.  The bad news is, we are depending on politicians to correct previous mistakes.  Problems like underfunded pension obligations are usually known in the market well before they become a crisis while there is still time to fix them in an orderly manner. How Could CT Compare to Other States as it Deals with Debt Obligations?

In the meantime, investors in bonds issued by the state of CT may see evidence of “headline” risk, where budgetary developments or additional ratings downgrades may cause some volatility in the price of the bond.

For our clients, we have been careful about how many State of CT bonds we include in their accounts to avoid some price volatility.  We generally use individual towns where more financial control is exercised.  The towns are much better at balancing their budgets and funding their pensions.   We have been adding more out-of-state names as well for diversification.