When it comes to municipal bonds, the headlines can drown out the news.
Horror stories from Chicago, Detroit and Puerto Rico, painting a harrowing financial picture amid talk of budget shortfalls and potential defaults, mask a sector that is otherwise pretty sound.
Since the financial crisis and accompanying recession, states and municipalities have in fact gone in a diametrically opposite direction from their counterparts at the federal level. In the aggregate, states and municipalities cut debt each year since 2011, though the first quarter of 2015 saw a 4.8 percent increase, according to the Federal Reserve. At the same time, the federal government has been piling on debt, rising in each respective year 11.4 percent, 10.9 percent, 6.5 percent and 5.4 percent.
"Not just for states but also for local governments, economic conditions are the best they've been in years," said Dick Larkin, director of credit analysis at HJ Sims & Co. "Most states and cities are seeing a resurgence in tax receipts, they're seeing improvements in their financial position, and there should now at this point be more (analyst) upgrades than downgrades."
Yet investors are getting a little antsy.
Over the past 12 months, the $3.7 trillion muni sector has seen a net inflow of $28.8 billion in investor cash, according to Morningstar. But the group saw $594 million in outflows during May and another $1.2 billion in June.
While most analysts agree the picture overall remains positive, there are three factors generating some anxiety: