Muni sweeps: Who is picking up the slack?

May 9, 2011
Some wealthy buyers swim against outflow tide". Connor makes the point that muni funds have been forced to sell off bonds for 25 straight weeks as they suffer redemptions and someone is picking up the slack. " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google,mail" data-share-count="false">

Good morning Muniland!

Muni funds down single bonds up

Michael Connor of Reuters has written an excellent article entitled “Some wealthy buyers swim against outflow tide“.

Connor makes the point that muni funds have been forced to sell off bonds for 25 straight weeks as they suffer redemptions and someone is picking up the slack.

If there wasn’t a strong pool of ready buyers then municipal yields would be rising. And in fact they have gone down.

Rich investors are taking up the slack.

From Reuters:

“Some of those people are starting to put money into long-term munis,” Dalton said. “They say, ‘Get me something highly rated and with a good yield’. They can’t stand getting their quarterly statements and seeing they are earning nothing.”

Munis were also benefiting mightily from a rally in U.S. Treasuries, low levels of new bond offerings not seen in more than a decade, and anticipation of a seasonal jump in redemptions and interest payments due in June and July, according to James Ahn, a municipals portfolio manager at J.P. Morgan. That money is typically reinvested in tax-free bonds.

“There’s also money on the sidelines and, with the realization supply may be limited, there’s capitulation,” Ahn said. “There’s a feeling I better get what I can today.”

Sophisticated investors. Snapping up munis. Taking up the slack.

Delink federal and state debt

Nicole Bullock of the Financial Times highlights arguments made by credit rating agency Standard & Poor’s that the rating of the US government and municipals are not linked.

From the FT:

S&P in April kept US sovereign debt at triple A but changed the outlook to negative, indicating a one in three likelihood that the US could lose its triple A rating within two years.

At that time, S&P said the move would not trigger a re-rating of the thousands of local bodies that raise money in the $3,000bn municipal bond market, which has been under pressure on concern about rising defaults in weak areas…

…According to the Rockefeller Institute of Government, the federal government accounted for 28 per cent of state revenue in fiscal 2008.

S&P’s stance is based on the rationale that its state ratings do not assume any direct federal backing of debt. “States have significant independent latitude to raise revenues and cut their expenditures,” said Robin Prunty, managing director of state ratings [at S&P].

Standard and Poor’s is stating the obvious because Federal Reserve Chairman Ben Bernanke has repeatedly stated that he will not provide a bailout to state and local governments.

Municipals are left to stand on their own creditworthiness.

Which is how it should be.

Tax tricks

Jason Zweig at the Wall Street Journal takes a look at Congress’s attempts to change the tax status of municipal bonds. I feel the momentum for the return of Build America Bonds building a little.

From the WSJ:

Every few years, Congress floats the idea of reducing or eliminating the muni-bond tax break, long favored by investors looking to shelter income from Uncle Sam. Such initiatives—no fewer than 125 since 1918—always have faded away.

At least until now. Several proposals are circulating at once. While no one can handicap the odds, analysts and investors say that tax overhaul has to be part of deficit reduction—and that the tax exemption on muni-bond interest is fair game.

Adjustments for America’s largest city

Henry Goldman at Bloomberg reports how the Big Apple is managing its financial challenges. Public education is taking a big hit.

From Bloomberg:

New York City Mayor Michael Bloomberg proposed a $65.7 billion fiscal 2012 budget to the City Council that contains no new taxes and would cut more than 6,000 teaching positions.

Reductions in state and federal funding will mean fewer jobs and services, the mayor said. Although 10 rounds of agency cost-controls since 2008 have trimmed spending by $5.4 billion a year, that hasn’t overcome increasing fixed and state-mandated expenses, including pensions rising to $8.4 billion in 2012 from $1.5 billion in 2002, he said.

Get some open government

John Moore writes in Government in the Lab about some successful open gov conferences in Oklahoma this weekend. This is exciting stuff and is happening all over the United States.

From Government in the Lab:

One of the most interesting examples of the power of these conferences came from a developer I bumped into at the conference.

On Friday he learned about the open data resources available from the Oklahoma Government web site. By mid-day on Saturday, with only 3 or 4 hours of work, he had a working iPhone application, based entirely off of the data available on the web site.

I promised not to write, not yet, about what the application does as he wants to further extend it and add it to the appstore, but I will say it is an application people will find useful in Oklahoma, and would be useful anywhere in the world. Stay tuned.

Mini sweeps

Bond Buyer: Moody’s: Issuers Fix VR Debt

MuniNetGuide: MSRB Reports Increase in Number of Primary Market Disclosure Filings in 2010

Wall Street Journal: Finra: Show Them the Muni

Reuters: Whittle down great pension expectations

Palm Beach Post: Florida Medicaid undergoes major rewrite, to shift 2.9 million people into managed care 11 U.S. cities honored as ‘walk-friendly’: Seattle ranks first

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see