"Full Faith and Credit" of General Obligation Bonds Comes to Critical Test in Alabama Bankruptcy
General obligation bonds are thought to be perfectly safe because they are backed by the ability to tax, no matter what it takes to pay off the obligation. I have been waiting for a test of this theory and that time is at hand.
Jefferson County Alabama filed the biggest bankruptcy in the history of the US and has stopped paying interest on its general obligation bonds.
People who own what is considered the safest type of municipal bond may be in for a surprise.
This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a ‚Äúfull faith and credit‚ÄĚ pledge. That means the government that issued it will pay it on time, no matter what.