California Debt Rating Raised by S&P

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California Debt Rating Raised by S&P

Postby jane1 » Fri Feb 01, 2013 3:59 pm

S&P raised CA rating. Just trying to understand how such things impact a state's muni bond market (from investor perspective, say VCAIX) in the short and long term. Do the interest rates i.e. yield drop (just like consumers with high FICO pay lower interest) but demand for the bonds increase, resulting in higher price/NAV, since the risk is lower?

California Debt Rating Raised by S&P After Surplus Forecast
http://www.businessweek.com/news/2013-0 ... and-p-to-a
Last edited by jane1 on Fri Feb 01, 2013 4:09 pm, edited 1 time in total.
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Re: California Debt Rating Raised by S&P

Postby NYBoglehead » Fri Feb 01, 2013 4:03 pm

When the bonds are rated higher they are perceived to be safer. So in theory this should lower CA's cost of borrowing.
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Re: California Debt Rating Raised by S&P

Postby neurosphere » Fri Feb 01, 2013 4:13 pm

jane1 wrote:S&P raised CA rating. Just trying to understand how such things impact a state's muni bond market in the short and long term. Do the interest rates i.e. yield drop (just like consumers with high FICO pay lower interest) but demand for the bonds increase, resulting in higher price/NAV, since the risk is lower?


For newly issued bonds, the rate that CA has to pay in order to attract money will be lower.

For existing bonds held to maturity, nothing changes.

For someone with an existing bond hoping to sell prior to maturity, the price they can obtain for the bond on the secondary market will likely be somewhat higher, although "higher" maybe something trivial.

I do not know what would happen to NAV of bond funds holding CA municipal bonds. If the fund tends to hold bonds to maturity, then really, nothing has changed, except that the risk of the overall fund may be lower, and thus may be more attractive and more may be willing to pay higher to own shares of the fund, so yes, I think there is a change that NAV could go up in CA bond funds, even if the funds are not actually sold prior to maturity.

I'm not a bond expert, i'm just thinking out loud. Hopefully someone with a greater understanding will confirm or refute.

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