Welcome to MuniLand
As we begin exploring the municipal bond market in this new Reuters.com blog, it’s helpful to take a historical perspective.
To help us understand on a quantitative basis we have some useful data from the Securities Industry and Financial Markets Association (SIFMA). The data tells us that the municipal market is shrinking on a relative basis to other fixed income classes. Quelle surprise!
The borrowing needs of states, cities and public/private partnerships have grown from ~ $400 billion in 1980 to ~ $2.93 trillion in 2010. This is about a 7 fold increase.
But total US debt outstanding has grown from ~ $ 2.57 trillion in 1980 to a whopping $ 35.97 trillion in 2010. This represents a 14 times increase. Or double the growth of municipal debt.
We are a debt nation. We consume debt to fund the federal deficit, to build infrastructure, to buy houses and cars, fund college educations and inflate the level of leverage in our financial institutions.
The level of debt this nation carries is certainly a drag on future growth and prosperity. This is because paying interest and principal on existing debt directs resources away from the projects we need to enter the 21st century with a strong infrastructure and energy policy. For example it’s hard for us to fund high speed rail and wind farms when we are paying off debt incurred to build sports stadiums and fund current social services.
Muniland is the crossroads of America’s past and future. We have substantial problems in parts of the muni market with states and cities that have unbearable debt loads. This is the public credit card that has been maxed out. And payment is coming due.
But while the overall size of the problem is large, it’s not unmanageable. This is because the balance sheets of private investors, banks, insurance companies and pension funds will have room to help the market make the adjustments necessary to resolve its problems. These investors can replace Treasury holdings and other fixed income investments with municipal bonds as uncertainties about pension liabilities and other issues are resolved. These investors are leery of uncertainty and calmer markets should draw them back in.
We also have the balance sheets of the more volatile players such as mutual and hedge funds. As interest rates go up the last two can provide liquidity by shifting away from equities and other fixed income to play in muniland.
Welcome to the land of municipal bonds!