MuniLand

There is no municipal CDS market

California Treasurer Bill Lockyer, who is responsible for issuing new debt for the state, takes a lot of interest in the price of California’s municipal credit default swaps. The price of muni CDS can affect the cost of issuing new debt, since some investors use muni CDS as a pricing benchmark. But new work published by risk-management firm Kamakura suggests that there is no real market for municipal CDS and prices are generated primarily by broker-dealers posting their best estimates. If a specialty market is just a matter of a few dealers privately sending quotes back and forth, is it a real market? I’m not sure that it is.

There was a big story last June about Treasurer Lockyer rooting out some inconsistencies in muni CDS prices. He noticed that there was a sudden drop in the day-to-day price of the CDS used to insure California’s bonds. Katy Burne of Dow Jones reported in June:

California’s state treasurer is looking into what he believes were erroneous prices reported last month for credit-default swaps tied to the state’s debt.

The annual cost of protecting $10 million of California debt against default over the next five years fell by $45,000 from one day to the next last month, an extraordinarily big overnight move. Tom Dresslar, a spokesman for Treasurer Bill Lockyer, said that CMA Datavision provided the prices to Bloomberg’s fixed-income data service.

Lockyer suspects the cost of credit-default swaps, which are expressed as a percentage of the amount of debt covered, was artificially high before the adjustment.

Muniland’s most active states

In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.

The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.

From Bonddesk’s December Transparency Report I pulled the data for these charts showing the seven most actively traded states’ bonds. Bonddesk uses “investor buys” data, which represents trades that end up in a retail investor’s account. In the bond markets there are often many trades between broker-dealers before the securities land in an investor’s account, so Bonddesk scrubs the data to show the real level of investor demand.

Let Europe kill municipal CDS

The solution to Greece’s debt crisis that Europe’s leaders announced on Thursday has market participants and commentators howling. It includes a provision that changes long-established rules for credit-default swaps mid-game. Mike Dolan, Reuters’ Investment Strategy Editor in Europe, said this:

For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies.

I’d suggest that death knell just rang for U.S. municipal credit-default swaps (CDS), too. They’ve recently been on their last legs amid collapsing volumes, but actions in Europe just might have delivered the deathblow.

All high government approval ratings are local

This great graphic from Visually maps the public’s great discontent with the federal government using data from the Pew Research Center. It’s hard to imagine the numbers being any worse than this: 11 percent of the public is satisfied with the officials in Washington, DC.

Given Pew’s research, it’s somewhat counterintuitive that a recent poll from Gallup shows Americans pretty content with their state and local governments. From Politico:

Trust and confidence in local government has hovered around 70 percent for the past decade, and the recent gridlock at the federal level has done little to sully local impressions of government. In fact, 68 percent of respondents to a new Gallup poll on Monday said they had a “fair” or “great” deal of trust and confidence in their local governments.

Thumbs down on infrastructure bank

Thumbs down on President Obama’s infrastructure bank

The Bond Buyer is reporting that U.S. transporation groups have given the thumbs down to President Obama’s proposed infrastructure bank. The core repayment mechanism for loans guaranteed by the proposed bank would be user fees and tolls. This contrasts to the current methods, which involve state and local governments borrowing in the municipal market to fund projects or the federal government collecting gasoline taxes to fund highway infrastructure. Given the growing opposition globally to the privatization of public assets, the core purpose of the infrastructure bank is bound to create more unease among public players and citizens. From the Bond Buyer:

American Trucking Associations president Bill Graves was skeptical.

“We’ve long advocated that roads and bridges should be paid for primarily by their users, through the most direct taxes possible: fuel taxes,” he said. “Allowing private capital to take their cut as part of an infrastructure bank, or by taxing other sectors to pay for roads and bridges, takes us further away from this core principle.”

Direct grants to state and local govts most popular part of Obama’s jobs bill

Planning a 21st century power system

Planning a 21st century power system

One of the biggest issues for America’s infrastructure is improving the national grid that moves electricity around the nation. From Wikipedia:

Historically, local governments have exercised authority over the grid and have significant disincentives to take action that would benefit states other than their own. Localities with cheap electricity have a disincentive to making interstate commerce in electricity trading easier, since other regions will be able to compete for local energy and drive up rates. Some regulators in Maine for example do not wish to address congestion problems because the congestion serves to keep Maine rates low.

In the US, generation is growing 4 times faster than transmission, but big transmission upgrades require the coordination of multiple states, a multitude of interlocking permits, and cooperation between a significant portion of the 500 companies that own the grid.

California: the queen of borrowers

California is the queen of U.S. states given her size, wealth and desirability. Her economy is the eighth largest in the world and, as of 2008, the gross state product (GSP) was about $1.85 trillion, or approximately 13 percent of the country’s gross domestic product (GDP). It makes sense that she is the largest municipal bond issuer given her population, geographic size and infrastructure needs. California dominates muniland on many levels.

Although California has a large and powerful economy, she also has a history of more dynamic economic swings than the rest of the nation. I’m not sure where the volatility comes from but I thought the comparison between the U.S. unemployment rate to the rate of joblessness in California over several economic cycles was interesting. In 2010 California’s rate was 12.4% while the national rate was 9.6% (data provided by the California Department of Finance). There are substantial regional weaknesses in the Golden State.

The Treasurer of California, Bill Lockyer, keeps track of the state’s borrowing and provides the graph below showing that $71 billion of general obligation bonds have been issued. The state legislature has set a debt ceiling of $150 billion and it’s likely that the Treasurer will be coming to the municipal bond market to issue more bonds soon. In July he borrowed $5.4 billion through a bridge loan from Wall Street banks to tide the state through the turmoil of the U.S. Congress raising the federal debt ceiling. Market talk is that he will borrow approximately $11 billion in the fall to repay the short-term bridge loan and fund additional infrastructure projects. The Golden State issued $10.5bln of general obligation bonds during 2010.

The gusher of municipal bond information

The municipal bond market is often thought of as complex and murky. This is understandable; after all, there are over 50,000 issuers of bonds and a million plus specific municipal-bond issues. It’s staggering to imagine so many different securities.

A specific bond issue can be as small as the $995,000 offer that the city of Moose Lake, MN has coming to market this week, or as big as last week’s jumbo-sized $10 billion “State of Texas Tax and Revenue Anticipation Notes, Series 2011A”. (The Texas notes mature in one year and are paying 2.50 percent interest — they’re hot as griddle cakes.)

Municipal bonds also come in many different shapes because there is very little standardization of structure among municipal bonds. A straight bond generally has a fixed interest rate, or yield, and a set maturity date, or time of repayment. But many municipal bonds have floating interest rates; many others can be called or refinanced when interest rates go down. Regulatory agencies like the MSRB or the SEC don’t require that bonds have a certain structure or feature, only that the details are fully and accurately disclosed.

Chapter 9 struggle: Unions are buying power

“The unions are buying power”

This is a great video of Stephanie Gomes discussing her experience as a member of the City Council in Vallejo, California, as they struggled through a municipal insolvency and bankruptcy. She talks about the power of the police and firefighter unions and their stranglehold on local politics. Gomes comes across as passionate citizen who was willing to confront some of the deep-seated problems in her community. She highlights the importance of local and national media attention on the “dirty laundry” of municipal finances like high salaries and generous pensions for union workers. Her experience is an important lesson for anyone interested in muniland.

Video via Vallejo Independent Bulletin and WPRI.com.

Jefferson County nearly files bankruptcy but instead ditches negotiator

The Birmingham News ran this above video of Jefferson County Commission President David Carrington discussing the commission’s meeting on Friday when they voted to delay filing Chapter 9 bankruptcy, cut out their court appointed receiver and deal directly with bond creditors. From what President Carrington says, it sounds like they almost filed bankruptcy at the meeting::

I thought we were going Chapter 9. I think I could take a test on Chapter 9 I know it so well.

Muniland likely resilient to U.S. downgrade

It’s a little frustrating to hear commentators outside of muniland bash all municipal bonds as though they were a homogenous asset class. AOL’s Daily Finance ran a quote from the top regulator at the Municipal Securities Rulemaking Board, who is pushing back on this idea:

“It is important to remember that only four to six [defaults] make headlines, but 45,000 others are doing OK,” Lynnette Kelly Hotchkiss, executive director of the Municipal Securities Regulation Board, tells DailyFinance. “Remember that every issuer is unique and needs to be analyzed on its own merit.”

Reuters is running with the meme that the municipal bond market will likely be resilient in the face of Standard & Poor’s downgrade of the United States. Bloomberg is sailing in the opposite direction with a gloomy view of the prospect of downgrades for munis after S&P’s action. The Bond Buyer reports that low expected issuance should help buoy yields. And the Wall Street Journal details how muniland has passed a critical threshhold in the second quarter as municipalities were able to renew and renegotiate their bank backstop agreements:

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