Amy Resnick is a GOVERNING contributor.
States and localities have increasingly used forms of variable-rate debt in their issuance, but now, as interest rates rise, that could land them in trouble. Governments that budgeted their debt service payments assuming January's rates--or the still-lower rates of last July--could find themselves short. While rates in the short-term market are still well below those for long-term, fixed-rate debt, predictions are for continued Federal Reserve Board hikes this year. In the first half of the year, short-term rates in the muni market were up 50 basis points to just over 1.6 percent, and forecasters see those rates nearing 4 percent by year's end.
While variable-rate debt is still a fraction of the municipal bond market, some governments, like some consumers, vastly increased their exposure to this part of the market while rates were low.
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