The calmest seas you will ever see

September 30, 2011

Low issuance, low defaults and low rates

For issuers, conditions are just about perfect in muniland now. Many have defered or withdrawn planned bond offerings, leading to greatly reduced supply for the year. Bloomberg estimates that 3rd quarter total issuance will be about $67 billion. This follows the $117 billion in muni securities issued in the first half of the year (data from SIFMA, Excel file link).

Through Q3 Billions
2010 $ 298
2011 $ 184

Defaults have also been puttering along at very, very low rates. This is due to some creative workout solutions, like Jefferson County’s negotiations with creditors, and many instances of postponement of problems, like Collingswood, NJ. I’ve seen estimates for total defaults for the year ranging from $1.8 billion (this number included unrated bonds) to $1.1 billion. Bloomberg says:

Municipal defaults have dropped this year to about $1.1 billion, a quarter of last year’s total, according to Bank of America Merrill Lynch. Local general- obligation bonds have accounted for only 1 percent of the 2011 failures [balance is revenue or conduit bonds].

The biggest benefit for state and local governments issuing debt is low rates. Low interest rates allow an issuer to bring bonds to market and pay a lower rate for the term of the bond — up to thirty years. Conversely this is bad for municipal bond investors who would like to receive higher rates for loaning money to state and local governments. One reason for low rates is that municipal interest rates tend to track U.S. Treasury rates, and those have tumbled with the European debt crisis. Secondly, there has been so little supply of new issuance that strong demand has driven rates down. Strong demand happens, in part, because yields on municipal bonds are still higher than yields on bank certificate of deposits or cash. Bloomberg one more time:

Yields on top-rated 10-year municipals were 2.02 percent yesterday after falling to 2 percent on Sept. 23, the lowest level since 2009, when Bloomberg records for the debt begins.

Don’t expect perfect conditions to exist forever in muniland. Like all financial markets it ebbs and flows. But current conditions for issuers are outstanding and we are unlikely to see such calm seas again.

President Obama’s plan could be even worse for high income muni holders

You might want to read a geeky but brilliant piece from Lynn Hume at the Bond Buyer about a provision in President Obama’s draft to the congressional deficit reduction supercommittee. The essence of President’s Obama’s proposal is to link higher taxes on wealthy municipal bondholders to the outcome of the debt reductions talks. If you would like a deep dive into the devilishness of our tax code and the efforts of politicians to use tax rates to control behavior, read on. Personally I think things like this contribute to uncertainty and economic malaise because people have no idea of the future. From the Bond Buyer:

President Obama has sent draft legislation to the congressional deficit reduction committee that would have the potential to further limit the value of tax-exempt interest for higher-income taxpayers below the 28% level proposed in his jobs bill.

The 284-page Debt Reduction Act of 2011, which nonprofit publisher Tax Analysts released this week, would require the Office of Management and Budget to establish steadily declining annual ratios for debt as a percentage of gross domestic product beginning with fiscal 2013.

If the ratios were not met in any given year, automatic cuts in spending and tax preferences, such as tax-exempt interest, would be triggered.

To balance that perspective read this Investment News piece, “House Republican sees muni bond tax break surviving.”

Amazon escapes taxes and treats some workers very poorly

I will admit that often I turn to to buy books knowing that I can save the sales tax and get a better price than buying locally. I may need to rethink my buying habits though after reading Ezra Klein’s account of Amazon’s working conditions where he recounts a report from Allentown’s Morning Call. From Klein’s piece in Bloomberg:

In a remarkable article published in Allentown, Pennsylvania’s Morning Call newspaper, reporter Spencer Soper interviewed more than 20 current and former employees of Amazon’s Lehigh warehouse to paint a picture of life in the Lesser Depression that looks more like “The Grapes of Wrath” than anything we expect to see in 21st century America.

The warehouse, Soper reported, is brutally hot in summer. In a nod to modernity, “computers monitored the heat index in the building and Amazon employees received notification about the heat index by email.” One day, the index “exceeded 110 degrees on the third floor.” A local emergency room doctor treated so many warehouse employees for heat exhaustion this summer that he called federal regulators to report an unsafe work environment.

Meanwhile Amazon is involved in a sophisticated campaign to escape any state sales taxes on their operations. From Stateline:

Other states have passed so-called “Amazon laws” requiring online tax collection, but the company has generally defied them. It took New York to court. It canceled its relationships with affiliates in Arkansas, Colorado, Connecticut, Illinois, North Carolina and Rhode Island, then argued that it wasn’t required to collect sales tax in those states because it lacked a presence there. It even offered Texas 6,000 jobs if only the state would give up the idea of forcing it to collect.

Amazon has been avoiding payment of state sales tax by exploiting a twenty year judicial ruling. From Reuters:

Under a Supreme Court decision now almost 20 years old, any national framework for collecting tax on remote sales would have to come from Congress.

Until that happens, states can only seek sales taxes from companies with a physical operation in their state, leaving many sales to fall through the cracks. Amazon has facilities in California and other states which have pushed the online retailer to collect taxes on sales shipped to their residents.

Proponents of federal action say the current situation is unfair to local merchants who must collect sales tax.

But it’s another side of the issue — the revenue loss to states and cities in uncollected taxes — that has fueled action on the state level. Besides California, the states of New York, Texas, Illinois and others have recently approved laws aimed at collecting more sales tax on ecommerce.

Treating workers poorly and avoiding tax collection duties are corporate decisions made by Amazon. It speaks volumes to the current corporate ethos in America.

@Twitter Talk

Chad Pergram @ChadPergram Chad Pergram  Van Hollen on prospects for supercommittee avoiding defense cuts: I don’t know if we’ll be able to get there or not. Only time will tell.

Bloomberg Government @BloombergGov Bloomberg Government  State tax collections have jumped 10% in the three months ended June 30 from a year earlier, the fastest quarterly growth since 2006.

All Things Census @allthingscensus All Things Census  Sixty percent of the nation’s black population lives in just 10 states, according to new Census 2010 report…

CSMonitor Politics @CSMnational CSMonitor Politics   Immigration law in Alabama to be enforced, toughest in US

Larry Sabato @LarrySabato Larry Sabato  Richmond (VA) sheriff hired what seems like half his family for high-paid jobs in his own office. Sense of entitlement is nauseating.

+Good Links +

The Economist: Which governments take the biggest chunk from a $100,000 salary?

New York Times: More Gloom Lies Ahead for Cities, Report Says

Reuters: The “success” of workfare when jobs are scarce

New York Times: States Putting Hopes in ‘Bottoms Up’ to Help the Bottom Line

Bond Buyer: San Jose Redevelopment Agency Faces Variable-Rate Default

GRAPH: “Twenty top issuers” from MunilC

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