Investor Beware! What Does the Illinois Budget Crisis Mean for Your Bond Fund?

A recent Capital Economics (CE) report shines an unforgiving light on Illinois’ ongoing budget woes—and what it finds isn’t pretty. The crisis, which has affected every level of government in the state, is a cautionary tale for not only public spending run amok but also independent investors taking too large of a risk by seeking high yields. The Land of Lincoln’s credit is already the lowest-rated in the union and, until recently, its debt came precariously close to being downgraded to “junk.” Were this to happen, it would become the first state ever to receive such an ignoble rating. The state’s 10-year bond yield has soared in recent months, which might attract certain unwary speculators. It’s our belief, however, that such debt should generally be avoided, as the risks are especially high. click to enlarge As I write this, a state budget could possibly be successfully negotiated, making it the first time in over two years that Illinois has operated with a...

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