Sequester fiascos would be good news for muni bonds

The municipal bond market, having ridden some rough seas recently, could be poised to benefit if and when something negative comes out of the dreaded sequester spending cuts. Even though the much-hyped $85 billion reduction in the pace of federal spending between now and October has amounted to a big yawn for the financial markets, it still adds up to a smaller federal subsidy for some programs and departments. “The good news is very few muni bonds are heavily dependent on a federal subsidy,” said Daniel Toboja, vice president of municipal bond trading at Ziegler Capital Markets. As Mr. Toboja sees it, much of the $4 trillion muni bond market could be poised for “a slight pop” if some of the worst sequester-linked fears start coming to fruition. “If there's talk of a possible recession and a stalling of economic growth, munis are where investors will start putting money,” he added. Finally, some good news for muni bonds, which first suffered through Meredith Whitney's doomsday projections of sweeping defaults, then faced threats from both the fiscal cliff and debt-ceiling debates. Of course, the outlook is less rosy for the muni bond cousin, Build America Bonds, which are structured with a more direct connection to federal reimbursement.