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Muni bonds could hit an 11-year low

The word bond spelled out with dice on top of stacks of coins represents rolling the dice with bonds.

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JEREMY HOBSON: Now let's get to borrowing by cities and states. Governments often go to the municipal bond market for what are essentially low cost loans to do big projects like building bridges and schools. But according to new data from Thompson Reuters, municipal bond issuance is on track for its lowest quarter in 11 years.

Let's bring in Richard DeKaser, who joins us live each Wednesday. He's an economist at the Parthenon Group. Good morning Richard.

RICHARD DEKASER: Good morning.

HOBSON: So what's going on now with municipal bonds?

DEKASER: Well, there's a few things going on. Market interest rates have increased. That discourages borrowing. States and local governments are also tightening their belts, and that means less spending, and also less borrowing, but the biggest factor almost certainly is the end of a federal program called The Build America Bonds Program, and this is part of the stimulus legislation in 2009 which gave generous incentives both to bond issuers and bond investors. And like Cinderella's stage coach, it expired -- midnight December 31st. So a lot of governments front loaded their borrowing, did so at the final months of last year and now what we're seeing is the other side of that which is a dirth of new borrowing.

HOBSON: And Richard I remember a lot of people saying that if the Build America Bonds Program that you talk about went away, which it did on December 31st, that we'd have a disaster in the muni-bond market. Is that what's happening right now?

DEKASER: I think calling it a disaster goes a little bit too far. Certainly it's making things tougher for bond issuers. But the economy's at a different stage of the cycle. We're no longer in the crisis we were two years ago. Everyone's having to surrender some of the very generous tax incentives that they had a couple of years ago. And state and local governments are simply one of those constituencies that's going to have to do with a little bit less.

HOBSON: Richard DeKaser, economist at the Parthenon Group, thanks so much as always.

DEKASER: My pleasure.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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