U.S. Credit Downgrade, Recession Fears May Impact States, Cities

Bonds with s federal funding component are likely to be affected, said Brian Battle, director at Performance Trust Capital Partners.

"Often those finance pollution control, housing or transportation projects, such as the O'Hare International Airport expansion."

As the markets fluctuate, and the effects of the U.S. credit downgrade become clearer, states and cities wait to see what will happen next.

"For now, some government officials are in limbo. And Illinois and Chicago, which already have subpar ratings, are more vulnerable to downgrades, said (bond expert Richard Ciccarone, managing director at McDonnell Investment Management LLC)."

"If Illinois is downgraded, it may see its borrowing costs rise by 0.5 to 2 percentage points, said spokeswoman Kelly Kraft."