The return of the bond vigilantes?

August 5, 2013

On Thursday, a small municipal bond deal for a Michigan county was postponed due to “lack of investor interest.” This is unusual, given the yield premium offered on the bonds. The Wall Street Journal has the story:

In the most tangible sign of fallout from Detroit’s bankruptcy filing, a Michigan municipality postponed a $53 million bond sale as investors blanched at the offered terms.

The Genesee offering didn’t attract enough buyers at a yield of 5.34 percent on a 29-year bond, the longest in the deal, according to people familiar with the offering. The average yield on a comparable 29-year municipal bond is 4.91 percent as of Thursday, according to Thomson Reuters Municipal Market Data.

The 43 basis-point extra yield on the deal seems to be a nice premium for the uncertainty that surrounds Michigan’s bonds in light of Detroit’s bankruptcy filing. But investors remained on the sidelines. It begs the question of whether we are seeing a new round of bond vigilantes. The traditional definition for a bond vigilante is:

A bond market investor who protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields.

Maybe a new kind of vigilante is emerging; one where bond investors, who have lost confidence in governments to stand behind the bonds they issue, refuse to buy the debt at any price. Given how Michigan Governor Rick Snyder has bad-mouthed bond investors and stood back from supporting other near-insolvent Michigan cities, it is not difficult to see this happening.

In a Bloomberg video, (at about the 3:25 minute) Snyder changes the subject when he is asked about other weak Michigan communities besides Detroit. Investors want the governor to say that the state intends to help support the communities that are in fiscal distress. Genesee County, the deal that was pulled, is rated A2 by Moody’s, but its economy is considered weak.

Credit raters are taking notice of the proposed harsh treatment of Detroit’s bondholders:

Jane Ridley, S&P’s primary Detroit analyst, said in an online presentation today that the company could change its ratings on general obligations throughout Michigan depending on how the bankruptcy judge treats Detroit’s debt.

Financial markets, especially debt markets, work on trust and confidence that debts will be repaid. Governor Snyder’s increasingly sour comments about bond investors is not doing his state any favors. He may even be laying ground for a new breed of bond vigilantes.

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