One very obvious observation that I have been repeating over and over is that it makes no sense to have expected that the worst financial crisis in 80 year was going to wrap up in 12-18 months. I have said repeatedly that there will be more shoes to drop. The latest news in Ireland is probably developing into another shoe--it is certainly market moving.
So it is with the state of the states, municipal bonds and muni bond ETFs. There was a quick segment on CNBC yesterday with Herb Greenberg talking about the S&P National AMT-Free Municipal Bond Fund (MUB) which has been selling off of late. It is down 5.5% since peaking on August 25th which compares to a drop of 2.46% for the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) which appears to be the closest treasury ETF in terms of maturity. These moves would not be a big deal for equities but bonds are a different story. The "distribution yield" for MUB is currently 3.36%. Extrapolating the September 1st dividend, anyone buying at the high might have been expecting a yield of 3.59% so they are down about 200 basis points beyond what they hoped to yield. The math in this process is simple math but still makes the point and obviously there is no par value for an ETF to return to and future payouts could be smaller depending on market conditions.
The states generally have a lot of problems in terms of having budget deficits, pension shortfalls and declining tax revenues (including sales, income and property) and these problems are not brand new and at this point should not be shocking to anyone. Given the telegraphing of this I have been saying for a couple of years now that avoiding exposure to this problem and however big it actually becomes seems like an obvious thing to do.
At times, recently, there have been pundits making the case for muni bonds for various reasons but it seems to me that these arguments rely on the market and system working the same as it always has like that the ratings are accurate and that there would be enough insurance should any AAA paper default. Whether you remember this or not, 15 years ago the notion of Fannie or Freddie failing was unthinkable. Four years ago how many people were using the argument of there never having been a national price drop for real estate (which I don't think was actually true) to explain why real estate prices would not drop nationally this time?Marc Ostwalt was quoted yesterday as saying 40 of the 50 states are technically bankrupt. It doesn't really matter if that number is accurate when you take a step back and think about the big picture. Repeated from above 48 states have budget deficits (the last time I looked), many states have serious pension problems waiting for them and the typical (tax) revenue sources are producing less revenue.
Objectively speaking, how does this space make sense? For tomorrow's post, I will repeat the above but replace "muni bonds" with "Big Western Europe." (humor attempt)
We are now in the middle of 24 hours of live college hoops on ESPN. Not too shabby.
9 comments:
IMHO, well-heeled investors drove muni prices up when it looked like the Dems would let the Bush tax cuts expire. Now that compromise is on the horizon, they're getting out. I don't think investors just woke up to the lousy financial conditions of our state governments.
Roger, I normally don't cross-comment but this topic came up at another blog WRT California muni's a few days ago and I'm a busy little beaver today (have to allocate that F windfall [g]) so ...
States and communities are under pressure everywhere; CA is highly visible and the nominal numbers are very big so it becomes ‘newsworthy’ (odd how little that means these days) but its just a another canary in the coal mine of US economic and sociopolitical debacle as far as I can tell. Frankly, on a percentage of GDP basis or per capita basis, I doubt CA is in significantly more trouble than twenty other states or a thousand other cities if it comes to that.
As far as muni-bond insurance goes, Ambac’s troubles, and that of all the other monoline insurers AFAIK, had everything to do with extending insurance to CDS’s and little or nothing to do with muni bonds. They should have stayed monolines in the nice sleepy muni business and not gone for the juice (same could be said of the mortgage lenders come to think of it). That insuring a muni would improve its rating and lower its yield actually enticed buyers to buy says more about the buyers than the bonds.
I’m already looking through the debris and seeing some quality GO’s with yields higher than treasuries of comparable duration getting dumped; hard to do better than that in a taxable income portfolio where bonds are typically held ’till maturity so I’m starting to buy. YMMD
The really pathetic part of this is that it's impossible to elect people who will actually address the problem. Why? 'Cause no one will actually address the problem.
Just had an election here in Illinois; an election that voters knew would accomplish nothing.
I'm buying for a trade (which pretty much means they'll be another leg down). Seems a bit overdone to me.
Hate to say this but.....I have to believe at some point, if the muni market keeps dropping, rumors will start to circulate that the fed will begin to buy munis in qe2 (or qe3 or qe4). Again, i'm not saying that is the right thing to do, all i know if that it would be an "easy" way for them to provide a bailout, etc to the states.
re the fed buying munis; i remember an article from a while back that said the feb buying munis was "illegal" but this author had figured out a loophole for the fed to do it. i can't vouch for any of that but it will be interesting to see what happens...from the sideline
The easiest way to help the states is to add a new tax bracket for the super wealthy starting at $1 million a year. Set the marginal tax rate to 45% or even 50%. The multi-millionaires and billionaires who fall into this bracket would still benefit since the first $1 million would stay at the 35% rate.
This would bring down borrowing costs by lowering muni bond interest rates.
People in
Which president grew the debt the most?
Ronald Reagan - 183%
The least?
Bill Clinton - 43%
A one time 15% tax on America's weathiest 5 percent would cut the deficit in half!
That is what happened to the middle class, the wealth was stolen and pushed up the pyramid scheme, otherwise know as the "market" LOL - primiarly by Republican "de-regulation"
When I look at the taxes Americans are required to pay I am reminded that "Jessie and Frank James had the courtesy to use a gun when they robbed people" Unknown
We have a muni bond problem, a housing problem, inflation on the way, elected officials who are clueless, food shortages coming and a possible collapse of the dollar, not to mention a stock market that is staying up on a wing and prayer. I really don't know if it can get any worse.
Post a Comment