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Own Munis? Worry About Wisconsin Now

An election showdown in Wisconsin has divided politicians like few issues in recent U.S. political history – but there is much more unity among financial advisers who consider municipal bonds a core holding in affluent investors' portfolios.

Wisconsin Governor Scott Walker
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Wisconsin Governor Scott Walker

A recall or close election of the state’s embattled governor, Scott Walker, Tuesday would likely jolt confidence among investors still worried over last year's fiscal turmoil and a dire warning from influential banking analyst Meredith Whitney about muni defaults. As voters went to the polls, election forecasters saw a tight race that depends on voter turnout.

Analysts said interest rates could rise in the short term as investors demand more reward for the risk of holding the state's bonds. The value of U.S. municipal bond holdings, estimated at close to $3 trillion, could be undermined in municipalities far beyond Milwaukee and Madison.

“If you own municipal bonds issued by any state, you should be hoping that Scott Walker wins the election,” said Andy Schwartz, a principal and financial adviser for Bleakley, Schwartz, Cooney & Finney LLC in Fairfield, NJ, whose practice is aimed at clients with $1 million plus in assets. Municipal bonds are bought largely by affluent investors who can use tax benefits and have retirement savings outside of IRAs.

Others pointed to the resilience of municipals over the past year, and saw no immediate impact. "What is most significant today is what it says about the November election," said money managerMark S. Germain, who sees munis remaining a top-tier investment ranked highly in today's volatile markets because they are "nearly as safe as treasuries."

In the two months ahead of the election this week, investors poured funds into the market at the highest rate in three years and interest rates are at all-time lows.Lipper reported inflowsfor seven weeks straight.

It’s a stark turnaround from last year when banking analyst Whitney warned of widespread defaults and investors dumped their muni funds.

Wisconsin bonds, like most other states’ municipals, have been stellar performers in an asset class that has beaten stocks and other investments. Nuveen Wisconsin Municipal Bond Fund gained nearly 12 percent in total return in the past year. Wells Fargo Advantage Tax Free rose 7.65 percent. Those big gains could evaporate quickly if new turmoil hits munis. Schwartz says the recall of Walker could hurt confidence in the muni market in many states.

“Interest rates would rise measurably for Wisconsin general obligation bonds,” Schwartz said, and other states might feel the impact. “This election has national implications.”

Directly on its border, Illinois, a state sometimes referred to as “America’s Greece” for its far worse finances, is thenation’s lowest-rated state, and California, with an economy the size of France, has gone through epic budget battles that continue to the present day.

A flood of national politicians and campaign money have deluged Wisconsin, with Republicans seeing Walker as a conservative champion and Democrats trying to derail him. Bond rating companies have zeroed in on the state as well, and will be keeping an election night vigil on Tuesday. Fitch last weekreaffirmed its AA ratings on the state but will “monitor developments on the recall and assess the credit implications of any change.”

Standard & Poor’s also said it will watch the election closely. “I’m surprised it hasn’t gotten more attention than it has,” said Gabriel Petek, S&P analyst for Wisconsin and California. Wisconsin has a stable overall credit profile that is slightly better than average, easing concern over short-term developments like the election, Petek said. And few have been anticipating Walker to lose, though polls in recent days have shown the race tightening.

The divisiveness of the budget battles like the one in Wisconsin could be a bigger issue over the long term, credit analysts said. Investors fear the uncertainty of political fights can bring funding to a standstill and threaten payments – like the one that froze Congress and chilled global markets last year. Wisconsin and Minnesota went through dramatic budget standoffs as well last year.

In the long term, political leaders who can avoid such fights might do more to restore investor confidence than aggressive moves short term moves that lead to problems down the road, said Petek. The Wisconsin recall stems from last year's bruising fight as Walker took on unions by curbing collective bargaining for state employees. Democrats walked out of the State Senate in protest, and the recall movement began.

Both parties pushed for new elections and the state government came to a standstill, leading to investor fears that debt payments would be missed. The election outcome could revive those worries.

“Investors prefer credit markets without headlines," Petek said. "This election falls into that category.”

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