Why NYC bondholders should be very afraid of 1970s-style financial crisis
The clown car that is New York politics, where the mayor is hanging on for his life and an assortment of leftists might find themselves running Gotham, is an unfortunate spectacle.It’s also signaling danger to a chunk of the financial markets because it’s an existential threat to investors who hold tens of billions of dollars in New York City municipal debt, analysts tell On The Money.The municipal bond market doesn’t get noticed like the stock market or crypto, but it’s pretty important.First, it’s nearly a trillion dollars larger than crypto, and vitally important to the nation’s economy.Municipal bonds, or munis, are issued by states and cities to finance roads, bridges and infrastructure.
The people buying them (that includes me) are what’s known as “retail,” aka small investors.Munis are big with individuals because they offer tax advantages, including triple-tax free returns if you buy bonds of the municipality where you live.For the most part, they are considered super safe.
They’re backed by various tax revenues or the full-faith-and-credit of the issuer.But, and this is a big but, they’ve been known to default.
Municipal bankruptcies are a rarity, but they do happen.New York City has always been a city with high debt levels because of our expansive welfare state and infrastructure needs.It has survived several budget crises, usually related to lower profits on Wall Street, a key driver of revenue.It had its brush with bankruptcy during the 1970s fiscal crisis, barely avoided total default, but investors lost money as prices tumbled.The Big Apple isn’t experiencing a 1970s moment or even a budget crisis, but the elements are in place to push us in that direction, and city bondholders could face some significant losses.Consider: The city is on politically unstable ground.
Mayor Eric Adams, a moderate, has been weakened by scandal.An avowed socialist, Public Advocate Jumaane Williams would take over for the interim.The Democrats co...