Mar 18, 2013 | by Franck Cushner, CFP®
Sequestration is affecting the municipal market as well, as the subsidy that bond issuers receive from the federal government may no longer continue.
Build America bonds are essentially taxable municipal bonds, where 35% of the bonds’ interest costs are subsidized by the federal government. Attractive to cities, municipalities, and states due to a portion of their interest costs being funded by the federal government, rather than entirely by the municipality.
Following the implementation of sequestration, Moody’s reported that state and local governments throughout the country will be impacted gradually by the cuts. States with higher defense industry exposure will obviously be affected more than other states.
The challenge is that sequestration is expected to cut subsidies, leaving local governments and municipalities, with higher-than-expected financing costs, at a time when many cities and governments are already making other cuts to their own budgets.
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