Deficit financing has caught up with Uncle Sam, as federal outlays for interest payments have surged to record levels and the nation’s annual budget deficit is on track to double in this fiscal year. That’s just for starters: To dampen inflation, the Federal Reserve has hiked short-term interest rates and keeps jettisoning U.S. bonds, not buying them as it had been. … In theory, the cost of high-quality muni debt should be less than the inflation rate, in light of the 30 percent tax-exemption advantage that many wealthy investors glean from them. But in today’s market, most states and localities must increasingly pay the price of near-record real interest rates in the U.S. Treasury market. Triple A issuers of 20-year serial muni bonds can slightly undercut today’s latest CPI inflation rate, but even they will pay a real interest cost if price inflation does eventually normalize to lower levels. Meanwhile, most muni issuers — almost everybody with lower ratings — are already paying a cost above inflation, albeit less than comparably rated corporate borrowers.
Source: Governing
