Public-sector cash invested tax-free today will likely buy more goods and most services next year, for a pleasant change. That produces a clearly positive “real” rate of return (net of inflation) for the first time in a decade. On the rosier side of this paradox, public-sector cash managers are now cheerfully gleaning short-term yields on their investments that exceed the CPI inflation rate. Although most pundits expect that Congress will ultimately approve various appropriations to avert a government shutdown, next year’s budget line items for intergovernmental aid will once again be on some budget hawks’ chopping block, and the perennial sparring over tax-exempt bond rules is always a collateral damage threat to the muni bond market. With nasty partisan political budget battling likely to resume in the coming month, the issue of deficit financing will return to center stage. Bond market math is indeed a dismal science. But fiscal hawks and critics of Modern Monetary Theory are crowing that a dreary hangover of elevated and more costly interest rates seems to be here to stay - at least until the next recession, when the central bank presumably will have no choice but to once again cut rates and investors flee stocks to pile into the safety of government bonds. Meanwhile, the impact on state and local operating budgets today is arguably net-positive for most. In California earthquake-speak, it’s a tremor, not a Big One. So far, the indirect impact on the municipal bond market of these tectonic macro shifts is measured in fractions of a percentage point, so it’s hardly the end of the world. The Fitch rating service has downgraded Treasury debt, citing the partisan congressional dysfunctionality fueling this fiscal food fight. Beyond that, compound interest will be America’s gnarlier enemy unless budget discipline is re-established on Capitol Hill. Those federal interest expenses appear doomed to escalate yet higher in the next year or two as older, cheaper debt rolls off the books while forthcoming budgets remain locked in deficits and ambitious prior infrastructure appropriations are spent. Meanwhile, key foreign buyers including China have recently exited the Treasury market, also driving yields a bit higher. That’s just for starters: To dampen inflation, the Federal Reserve has hiked short-term interest rates and keeps jettisoning U.S. Deficit financing has caught up with Uncle Sam, as federal outlays for interest payments have surged to record levels and the nation’s annual budget deficit is on track to double in this fiscal year.

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