Can Government Bonds Be Junk Bonds?

As talk about corporate junk bonds rises above a murmur in the investing world thoughts about the relationship of “junk status” to government deficits and debt levels may (should) filter into your thinking about buying government issued and backed bonds.

Take a moment to reflect upon what happened to Detroit’s bond holders by reading this article: Detroit Bond Holders Taught Painful Lesson in Bankruptcy.

Now, take a few minutes to scan, – or better yet, take a few more minutes to read – this little PDF from the Council of State Governments discussing the idea of the U.S. Congress expanding the authority of the U.S. Bankruptcy Courts over State petitions for bankruptcy relief: State and Local Bankruptcy, Municipal Bonds and Pensions.

One quote from the above linked PDF:

The national conversation now underway whether Congress should enact preemptive authority for states to file for bankruptcy is treacherous because of its unintended consequences. The mere existence of a federal law allowing states to declare bankruptcy would only serve to increase interest rates, rattle investors, raise the costs of state government, create more volatility in fi nancial markets, and erode state sovereignty under the 10th Amendment to the U.S. Constitution.

Now, ask yourself:

  1. Do I know the level of debt already aggregated by the government agency (municipal, county, state, special district, etc) issuing bonds?
  2. Has the existing governing body exhibited a willingness to raise taxes to pay their obligations and fund government programs?
  3. Have I examined the bond rating for this obligation? What about insurance to cover the bond in the event of a default?
  4. Lastly, in the event of a series of defaults how will the insurance stand up? Is there “insurance on the insurance”?

Government backed debt is as secure a debt obligation as you can invest your money in. However, even a government issued obligation is not perfect. So, do your homework. Talk to a professional with knowledge of the government bond market.