Because of their tax advantage and historic safety, municipal bonds were a standard part of the portfolios for conservative investors, especially newbies. That could change, depending on how court rulings go in the Chapter 9 bankruptcy filing for Stockton, California.
As Bloomberg reports, Stockton wants to lower the amount of the principal it will repay municipal bondholders. However, the good news for those bondholders is that has not happened since The Great Depression. Bondholders always got their principal back in a city bankruptcy.
If Stockton does get such a cut approved by the bankruptcy court, then that will shake confidence in the muni market. Also, it seems obvious, Stockton will suffer the long term borrowing consequences. If it attempts to borrow again in the muni market the interest rate could be higher or it could be shut out completely.
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