President Trump Has Vowed To Withhold Funding For So-Called Sanctuary Cities

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Equity investors are not the only people anxious about Trump's policies; so are debt holders.

Bondholders may find comfort in Fitch Ratings' findings on Trump's immigration executive order.

President Trump has vowed to withhold funding for so-called sanctuary cities.

The rumblings over the actions of newly-elected President Donald Trump have been on full display throughout the world over the last few weeks.

Investors have handled it fairly well. We are not seeing them selling off their holdings because of what headline is splattered across the day's news.

One area I've watched relates to local governments, particularly those that deem themselves to be "sanctuary cities" for undocumented immigrants. President Trump has threatened to withhold funding from these cities if they continue to not comply with federal immigration laws.

This week, one of the three major rating agencies weighed in on the matter, and their findings may offer some comfort to bondholders. The thought that these cities, many of which don't have the strongest balance sheets, losing a funding source, is not something debt holders want to hear.

Safe zones

City officials who run these safe haven zones pride themselves on allowing illegal immigrants to live there without fear of arrest or deportation. This stance is applicable even if the immigrant is wanted for committing crimes.

To force these jurisdictions to follow the law, Trump last week inked an executive order that affects "sanctuary cities." The order threatens to withhold federal funds from any jurisdiction that did not comply with the law.

The idea of any municipality, many of which are seeing their budgets under pressure, losing a funding source is disturbing. No debt holder wants to hear that a funding source could dry up because it could affect the issuer's ability to cover the debt service on their outstanding debt.

Fitch Ratings weighs in

Bondholders of debt issued by sanctuary cities can breathe a slight sigh of relief. That's due to Fitch, one of the three major rating agencies, determining that plans to cut federal funds to them won't impact their revenues substantially.

In releasing its statement, Fitch Ratings also noted that it maintains its stable rating for U.S. local governments, including those considered as "sanctuary cities."

Clearly, this is good news for investors in municipal bond funds and ETFs, such as the iShares National AMT-Free Muni Bond ETF (NYSEARCA:MUB) and the Advisor Shares Peritus High Yield ETF (NYSEARCA:HYLD).

It's also good news for the sanctuary cities, many of whom said they would not stop being a safe haven for illegal immigrants, even those who have committed crimes.

In its report, Fitch said that even if a jurisdiction's status as a "sanctuary city" were clear, the amount and method of implementation of proposed federal cuts is not.

For example, Fitch points out that the executive order excludes funds "deemed necessary for law enforcement purposes."

Even more important is the agency's point that federal funds flow to states, counties, and school districts rather than cities themselves.

Direct funding is limited, and since it is restricted, Fitch believes that policy priorities would drive decisions on continuing to fund locally the affected programs. Fitch does not believe such policy decisions materially affect credit quality, as long as they are fiscally sustainable. Moreover, civil and constitutional challenges appear likely to impede the implementation of the executive order - Fitch Ratings.

Singled out

In its statement, Fitch singled out a handful of cities: New York, Los Angeles, San Francisco, Boston and Chicago. By no means does that mean these are all the municipalities that face losing federal dollars for their self-promotion of being "sanctuary cities."

Perhaps like none of the other municipalities is Chicago, which is already trying to overcome financial challenges. So dire has its financial situation grown over the years that its bond rating has been lowered to junk bond status. That was done by Moody's Investors Service.

Moody's and Standard & Poor's did not release specific reports related to "sanctuary cities" as Fitch did this week.

Playing munis

Fitch's breakdown on "sanctuary cities" didn't cause major moves in the municipal bond market. The iShares National Muni Bond ETF closed at $108.31 on the day of Fitch's report on these jurisdictions. This was a small fall from its opening of $108.45.

Bondholders should stay the course with their long-term holdings. However, cities like Chicago, do warrant close attention, due to their ongoing, and troublesome financial problems.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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