Immediate Effect
The California bankruptcies probably won’t have an immediate effect on the municipal-bond market, where prices are rising and yields are shrinking, Larkin said. Investors are more focused on the debates in Washington over the fiscal cliff and whether municipal bonds will remain tax-exempt, he said.
Should Calpers win, investors who buy municipal bonds will eventually demand higher interest rates from cities and counties to compensate for the increased risk, Richard A. Ciccarone of McDonnell Investment Management LLC said in an interview.
“It would put more bondholders at risk than would normally be at risk,” said Ciccarone, chief research officer at Oak Brook, Illinois-based McDonnell, which oversees about $8 billion in municipal debt.
Employee pensions should be paid ahead of sophisticated investors who understood the risks of buying municipal bonds, Calipers’ Glazier said in the e-mail.
“Calpers will champion our members who have relied on the retirement promises made by the City of San Bernardino,” he said.
The case is In re San Bernardino, 12-28006, U.S. Bankruptcy Court, Central District of California (Riverside).