Muniland is tightening up the ship

July 6, 2011

Muniland has always been a sleepy corner of the financial markets. This all changed last winter when, from out of the blue, dire predictions of the market’s imminent collapse were made on national television. Since then, there has been a lot of uncertainty about the stability of state and local governments’ revenues and their ability to support their debt loads. States took steps to tighten up the ship and get ahead of the problems. Now the data is starting to come in, and although muniland has many problems to address, matters look much better than were predicted.

Sanity Prevails On CNBC

I took this headline from a note published this morning by Daniel Berger of Thomson Reuters Municipal Market Data. Daniel says:

Yesterday afternoon we were pleased to see CNBC finally air an articulate case about the value of municipal bonds. On CNBC’s Fast Money afternoon show we saw Alexandra Lebenthal present an intelligent case that municipal bond investors can find value in long-term municipal securities.

Let us clarify Alexandra’s presentation in simple terms. She was referring to the 5-30yr slope which is currently at 308bps. This means that an investor who buys 30yr muni bonds now receives 308bps more than for a 5yr muni bond which is close to its all-time high for the past ten years (the high of 321bps was reached on 1/30/09).

During the past ten years, this differential has averaged 185bps. This means that should this spread revert back to its mean, an investor will achieve outperformance.

Muni defaults falling year over year

From Reuters:

Six months after dire predictions rocked the $2.9 trillion U.S. municipal bond market, the actual value of bond defaults in the first half of 2011 was well under $1 billion, according to data provided to Reuters by Income Securities Advisors.

Only 26 issues defaulted in the first half of the year, down from 60 in the first six months of 2010, the data showed. The value of defaults fell sharply to $818.2 million in the first six months of 2011 compared to this point last year when defaults totaled about $2.8 billion.

Muni bonds roar ahead

From Reuters:

The U.S. municipal bond market had its best quarterly performance in two years in the second quarter of 2011, besting both U.S. Treasuries and corporate debt, according to BofA Merrill Lynch Global Research on Tuesday.

Munis had gains of 4.453 percent on a total-returns basis for the quarter, which ended on Thursday. That marked the best performance for the sector since the first quarter of 2009, when the market gained 4.425 percent on BofA Merrill Lynch indices.

By comparison, corporate debt gained 2.295 percent and Treasuries gained 2.284 percent in the second quarter of 2011.

Financial Times: Best quarter in nearly two years for munis

No progress in Minnesota

From AP:

Democratic Gov. Mark Dayton and Republican legislative leaders plan to meet again Wednesday to try to settle the dispute over taxes and spending that led to the shutdown. They reported no progress after talking for an hour Tuesday, their first meeting since the government closed Friday.

The shutdown resulted from a budget impasse over how to erase a $5 billion deficit. Dayton wants to raise income taxes on the state’s wealthiest residents to provide more money for social services and public education. Republican lawmakers oppose any tax increases.

Meanwhile, organizations and residents who depend on state funds have been pleading their cases to former Minnesota Supreme Court Chief Justice Kathleen Blatz, who has the power to recommend that certain programs essential to life, health and public safety continue during the shutdown.

New York Times: Antitax Extremism in Minnesota

Good links

Stateline: Wyoming first in federal dollars per capita

Tax Foundation: California Becomes Seventh State to Adopt “Amazon” Tax on Out-of-State Online Sellers

The Business of Government: Another Round of Medicaid Reimbursement Cuts

The Business of Government: Pains and Pleasures of Restructuring

The Business of Cities: City Indexes in 2011

Toll Road News: Ohio Gov Kasich gets legislation to lease Turnpike – RFP must be OK’d

New Urban Network: Orlando commuter rail gets the go-ahead

Grist: Groundbreaking solar plant in Spain generates 24 hours of power

New York Times: Fiscal Puzzle: Balancing Wilmington’s Budget

Mercury News: San Jose Redevelopment Agency trying to keep up spirits amid its last stand

Sungard: New York City Day 2011 Keynote Speaker, Meredith Whitney

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