Why Harvey's Not Rattling a Bond-Market Haven: QuickTake Q&A
The record-setting flooding that’s devastating Houston has caused thousands to flee their homes, submerged much of the city and left tens of billions of dollars in damage. It has also cast some uncertainty over the finances of governments in the devastated region that routinely raise money in the U.S. municipal-bond market. In just Texas’s Harris County, the home of Houston, there are about $67 billion of outstanding government bonds, some issued for hospitals, sewer lines, schools and other projects potentially affected by the deluge. So far, however, investors appear relatively confident that an influx of aid will keep those borrowers from going under.
1. Will Harvey cause municipal-bond defaults?
That’s extremely unlikely. Natural disasters haven’t caused a single default by a municipal borrower that was rated by Moody’s Investors Service, according to David Jacobson, the company’s spokesman. Even Hurricane Katrina, which flooded much of New Orleans and triggered a lasting exodus from the city, didn’t force it to renege on bond payments as the state and federal government extended aid to help the region rebuild.
2. How has the bond market reacted?
There’s been very little trading of bonds issued by affected government agencies since Harvey hit, with no significant changes in the prices of those that have changed hands. Such a muted reaction also followed Katrina and Sandy, the superstorm that hammered New York and New Jersey in 2012. The small lots of securities that have traded indicate that it’s individual bondholders who are reacting, not mutual funds and other big investors. Matt Fabian, a managing director at Municipal Market Analytics, said in a note to clients that if there is a significant drop in the price of Houston’s bonds it may be a good time to buy.