Non Sovereign Government Bonds

Non Sovereign Government Bonds are issued by local governments (cities, states, and counties) and quasi-governmental entities. Municipal bonds are a significant part of the overall U.S. bond market. Interest payments from municipal bonds are most often exempt from national income taxes. Default rates for municipal bonds are very low relative to general corporate bonds.

Most municipal bonds can be classified as general obligation bonds or revenue bonds. General obligation (GO) bonds are unsecured bonds backed by the full faith credit of the issuing governmental entity, which is to say they are supported by its taxing power. Revenue bonds are issued to finance specific projects, such as airports, toll bridges, hospitals, and power generation facilities.

Unlike sovereigns, municipalities cannot use monetary policy to service their debt and usually must balance their operating budgets. Municipal governments’ ability to service their general obligation debt depends ultimately on the local economy (i.e., the tax base). Economic factors to assess in evaluating the creditworthiness of GO bonds include employment, trends in per capita income and per capita debt, tax base dimensions (depth, breadth, and stability), demographics, and ability to attract new jobs (location, infrastructure). Credit analysts must also observe revenue variability through economic cycles. Relying on highly variable taxes that are subject to economic cycles, such as capital gains and sales taxes, can signal higher credit risk. Municipalities may have long-term obligations such as underfunded pensions and postretirement benefits. Inconsistent reporting requirements for municipalities are also an issue.

Revenue bonds often have higher credit risk than GO bonds because the project is the sole source of funds to service the debt. Analysis of revenue bonds combines analysis of the project, using techniques similar to those for analyzing corporate bonds, with analysis of the financing of the project.