Phil Cannella has spent almost 40 years in the insurance industry, so he knows a safe investment when he sees one. And according to Phil Cannella, the bond market is not a safe investment for retirement savings. Research from Retirement Media Inc. found that Moody’s, a leading provider of credit ratings, research, and risk analysis, has downgraded the credit rating of America’s 3rd-largest city to junk-bond levels. Moody’s rating system, which grades bonds from Aaa to C, makes a distinction between investment-grade and junk level bonds between Baa and Ba, the exact fall-off that Chicago’s credit experienced. This is just the latest setback in a series of events that has engulfed Chicago—and the state of Illinois as a whole.
“What many investors and everyday Americans don’t realize is that interest rates have been down for 10 years and that poor interest rate environment affects the bond environment in a negative way.” -Phil Cannella
When interest rates moves lower, bond values increase—accordingly, bond values have been up for the past decade. However, the reverse is also true. When interest rates start to increase, bond values will be depressed. A full decade without an increase in interest rates in unprecedented in the American economy, and as interest rates go up, it could be very detrimental to some bond holders. Adding to the problem were the words of Illinois Governor Bruce Rauner, who said that no bailout money will be coming from the state government to help Chicago. That’s because the state of Illinois is locked in what Governor Rauner calls a “terrible financial crisis” of its own. Experts said the downgrades in credit ratings could trigger upwards of $2 billion in accelerated debt payments. But that’s going to be a big problem, because according to CNBC, the city and state are underfunded by $130 billion!
Of course, the municipal bond crisis really got started two years ago, when Detroit became the largest U.S. city to declare bankruptcy. Since then, cities such as Stockton, CA have filed for protection from bankruptcy. But a crisis in Chicago—again, the country’s third largest city—would take things to an entire new level.