Investors are content to wait and see the outcome of President Donald Trump's latest threat to cut federal funds to sanctuary cities starting in February, saying buying decisions remain driven by credit fundamentals rather than political uncertainty.
"At this time we are not making any portfolio changes," said Nate Harris, director of credit research at Appleton Partners, Inc. "We'll have to see come February 1 if anything actually does happen."
During a speech Tuesday at the Detroit Economic Club, Trump warned he was set to halt federal funding to so-called sanctuary cities and states, which the administration deems as having laws that hamper federal immigration enforcement.
"Starting Feb. 1, we're not making any payments to sanctuary cities or states having sanctuary cities, because they do everything possible to protect criminals at the expense of American citizens and it breeds fraud and crime and all of the other problems that come," Trump said. "So we're not making any payment to anybody that supports sanctuary cities."
The comments mark the administration's latest effort to halt funding to cities and states that have policies opposed by the administration. Democrat-run governments were in court most of last year over previous threats tied to immigration policy. In August, a California judge issued a preliminary injunction blocking the administration from withholding unrelated federal grants from a group of sanctuary cities and counties. The administration has appealed the ruling to the Ninth Circuit Court of Appeals.
Like the previous attempts, this one is expected to land quickly in court. "We will go to court within seconds, and we will win if he does this. It's already proven unlawful. We've already won multiple times," California Attorney General Rob Bonta
The White House hasn't released specifics about Trump's latest threat. Previous orders focused on grants and loans, but "this one seemed a little more vague and could potentially capture more funding," said Paige Mellerio, senior policy advisor at the Government Finance Officers Association.
"This was an announcement by the president as opposed to a more traditional executive order, so we're waiting on details to see how this will all shake out," she said, adding the GFOA is working with other state and local associations on the issue.
The Feb. 1 deadline is reminiscent of a
The Department of Justice in August published a
"There are big credit differences between Chicago and New York City," said an investor who asked to remain anonymous. The "horribly funded" status of Chicago's pension system is "much more important than the political uncertainty," the investor said.
Appleton's "up-in-quality bias" helps protect against material credit impact from the political uncertainty, Harris said.
"The names we're invested in, they're not immune to these types of threats or even eventual events, but we generally have the opinion that they have other resources and revenue diversity that provides an offset to whatever can happen in the future," he said. "The local governments that we're keeping an eye on are ones that have challenging credit conditions and the potential for disruptions to federal government funding is just an added challenge for them."
Bond buyers would do well to keep their eye on the larger trend of a general reduction in federal funding facing all cities and states, said the second investor. That will lead to more bifurcation in the market.
"It's not necessarily sanctuary city-related, it's the federal funding, which is 40% on average of states' budgets, that's coming down," the buysider said. "It's going to keep supply high but mean further credit differentiation, which we think people are taking for granted."
The expected reductions in federal funding is "budget negative across all levels," the investor said.
