Proximity to the madness

More alarms are ringing in muniland today. Moody’s issued a statement announcing that it was putting on review five states which have Aaa ratings. Aaa is Moody’s highest rating, and the agency is concerned that knock-on effects from the federal government could weaken the ratings of these states.

I made this chart detailing the specific rationale Moody’s used for each state from the statement they released today. Note that states which have a large dependence on federal jobs and contracts dominate the list. ————– Sensitivity to natl trends Fed workers as % of employment Fed contracts as % of state GDP Medicaid as high % of budget Low rainy day fund Maryland *** *** New Mexico *** *** *** South Carolina *** *** *** Tennessee *** *** *** *** Virginia *** *** *** ***


At the same time, state finances have generally been improving around the country. The Rockefeller Institute issued their quarterly tax collections report today and reported that state tax revenues are up 9.3% on average:

Total state tax collections as well as collections from two major sources — taxes on sales and personal income — showed growth for the fifth consecutive quarter, following five straight quarters of decline. Overall state tax revenues in the first quarter of 2011 increased by 9.3 percent from the same quarter of the previous year

Insurers have “manageable” muniland risk

Insurers have “manageable” muniland risk

Meredith Whitney has made many assertions about muniland, but the only one that I had not heard from others before she stepped onto the national stage was her contention that insurance companies would be forced to sell their municipal bonds into a declining price spiral. She alleged this would collapse muniland, so it’s very interesting to see Moody’s assess the risk for insurance industry. From Property Casualty 360:

Property and casualty insurers remain the most exposed sector among financial institutions to volatility within the municipal-bond market, holding about $355 billion in municipal bonds, but the overall level of risk should be manageable, Moody’s says.

In a Special Comment, Moody’s says municipal bonds represent 60 percent of the industry’s equity capital base, as measured by policyholders’ surplus. This figure is down from the prior year, when the industry held about $370 billion in municipal bonds, representing about 70 percent of policyholders’ surplus.

Bank backstops for municipals

There is a very interesting class of municipals that you may not know about.

They are called “variable rate demand obligations” (VRDOs).

Moody’s estimates the market size at about $380 billion or 13% of the $3 trillion municipal market.

Moody’s issued a report today saying that this class of munis is finding its sea legs. This is good news for muniland. The health status of VRDOs was a big concern for market participants and Moody’s is cautiously optimistic.

VRDO’s are bonds issued with longer maturities (up to 30 years) that you can put back to the trustee or tender agent with a little notice.

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