Until New York City’s default, most bonds moved up or down in unison. Various indexes of the postwar municipal market seemed to measure the same thing: general changes in interest rates. By September 1976, however, the Bond Buyer index registered 6.15 per cent, the Dow Jones 6.49 per cent and Standard & Poor’s 6.21 per cent. Moody’s Average—the one average reasonably free of the “New York effect”—diverged considerably, registering 5.90 per cent. This divergence reflected the presence of fear and prejudice in the minds of investors that wasn’t there before—particularly with respect to large Eastern and urban credits.

A sudden development, the New York effect on the market yields associated with these credits was widespread because holdings in New York City notes and bonds were widespread. As large Eastern cities demonstrate that they are not going to follow New York City into default, prejudicial increases in their bond rates should disappear. It is likely, however, that at least a portion of the New York effect, reflecting investors’ heightened determination to discriminate between weak and strong municipal issuers and their continuing skepticism toward unaudited or non-comparable financial statements, will remain.