The Stockton Bankruptcy: Should Investors Be Worried?

The Los Angeles Times is reporting that the Stockton, Calif., City Council plans to vote tonight on whether or not to declare bankruptcy. If it votes yes, the city would become the largest in U.S. history to enter Chapter 9.

That’s bad news for Stockton’s bond holders, but the municipal-bond market is generally shrugging off the news. The iShares S&P Naional AMT-Free Muncipal Bond exchange-traded fund, the largest municipal bond ETF, has dropped just 0.1% as of 11:52 am today, while the Market Vectors High Yield Municipal Index ETF has dropped 0.2%. Both funds continue to trade at a premium to their net asset values, according to Morningstar.

Matt Fabian, managing director of research firm Municipal Market Advisors, doesn’t find that particularly surprising. Yesterday, he noted in a report to clients that he doesn’t “expect negative market action [to] follow the filing; the city’s situation has been well discussed in the industry and the media and it does not appear as precedent to additional filings by other CA cities in the near term.”

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