Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Who is benefiting is obvious even without reading this WSJ editorial.
State tax-free income became more valuable to those who could no longer deduct state income taxes (SALT limitations), i.e. the very high earners in low income/low property value states and the middle class and above in high income/high property value states.
Consequently, states have to pay somewhat less interest on the bonds. This allows them to borrow more, but also benefits these taxpayers who ultimately bear the cost of state expenditures.
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Muni bond investors likely know that two of the NRSROs (Moody's and Fitch) "recalibrated" their muni bond ratings in 2010. That is, they changed the curve on which they graded muni bonds, because AA muni bonds tended to be as safe as AAA corporates. So formerly AA munis were changed to AAA and so on.
This editorial challenges the recalibration, asserting that this lowered rates on muni bonds. Of course interest rates dropped. If a bond looks safer buyers demand less interest. However, nowhere does the editorial suggest that the recalibration was inaccurate.
My question is, given this professed concern by the Editorial Board in the accuracy of NRSROs, where was the WSJ back in 2007 when CDOs were all getting great ratings?
Side note: I'm reading the column online at home courtesy of the library at a university in which I'm registered as a student. Registering and not sitting in on classes is actually less expensive than subscribing (not that this is why I sign up for classes - free access is just an added benefit.)
Comments
State tax-free income became more valuable to those who could no longer deduct state income taxes (SALT limitations), i.e. the very high earners in low income/low property value states and the middle class and above in high income/high property value states.
Consequently, states have to pay somewhat less interest on the bonds. This allows them to borrow more, but also benefits these taxpayers who ultimately bear the cost of state expenditures.
----
Muni bond investors likely know that two of the NRSROs (Moody's and Fitch) "recalibrated" their muni bond ratings in 2010. That is, they changed the curve on which they graded muni bonds, because AA muni bonds tended to be as safe as AAA corporates. So formerly AA munis were changed to AAA and so on.
This editorial challenges the recalibration, asserting that this lowered rates on muni bonds. Of course interest rates dropped. If a bond looks safer buyers demand less interest. However, nowhere does the editorial suggest that the recalibration was inaccurate.
My question is, given this professed concern by the Editorial Board in the accuracy of NRSROs, where was the WSJ back in 2007 when CDOs were all getting great ratings?
https://www.mercatus.org/publication/brief-history-credit-rating-agencies-how-financial-regulation-entrenched-industrys-role
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Side note: I'm reading the column online at home courtesy of the library at a university in which I'm registered as a student. Registering and not sitting in on classes is actually less expensive than subscribing (not that this is why I sign up for classes - free access is just an added benefit.)