Markets

Munis are entering a negative feedback loop, according to J.P. Morgan analysts led by Peter DeGroot.

Credit ratings for California utilities could face downward pressure as recurring wildfire risks test safety funds and strain balance sheets.

"In a few years, Brightline may have to consider going through something like this again," warned one investor.

Ahead of a refinancing next week and a new money deal next month, Chicago's spreads have widened, suggesting the market may be pricing in a downgrade, analysts said.

Moody's Ratings said the downgrade "reflects a weakening of the county's financial position."

Muni yields are succumbing to a "domino effect," said Kim Olsan, portfolio manager at NewSquare Capital.

The selloff in munis this week is "against a backdrop of historic bid wanted in competition volume, continued rate volatility, tax-loss selling [and] unfavorable technicals," said J.P. Morgan strategists.

Strong rainy-day funds remain a key buffer, but states that rely on volatile revenues or face rising Medicaid, education and infrastructure costs may have less room to absorb the next shock, writes Market Intelligence analyst Jeff Lipton.

The outlook revision to positive from stable is the second this year for the state after Moody's Ratings took similar action in May.

Muni yields have been slow to reprice Federal Reserve expectations, but on Wednesday, they caught up fast, said James Pruskowski, managing director at Hennion & Walsh.