MuniLand

Lisa Pollack of Markit in London posted via Twitpic this table of DTCC data on municipal credit default swaps. Since California is the biggest muniland issuer it’s not a big surprise that it leads with the greatest number of contracts outstanding.

The market is cleaved into two pieces

The Municipal Securities Rulemaking Board has issued a critical new rule for muniland. The rule, known as G-23, prohibits a dealer, such as JP Morgan or Goldman Sachs, from advising a municipal entity and then switching hats to act as the underwriter. Do you see the massive conflict that this could have posed?

The dealer, acting as an “adviser,” could have set up the municipality to structure a bond that had more expensive fees than a straight bond, and then jump over to being the underwriter to collect the higher underwriting fee. If a dealer is acting in a dual role, who is looking out for the issuer’s interest? Previously the dealer was only required to make a disclosure that the dual role could be a conflict.

I really welcome the new rule and congratulate the MSRB for resisting the dealers’ weak arguments that small issuers would be disadvantaged. Generally, it’s the small issuers that are most often preyed upon — see my post from yesterday on Pennsylvania’s muni swaps repository.

MSRB: MSRB Adopts Dealer Role-Switching Prohibition

Dow Jones: Muni Bond Board Forbids Advisers To Also Act As Underwriters

Reuters: U.S. muni board divides advisor, underwriter roles

SIFMA: SIFMA Comments to SEC on Proposed Amendments to Rule G-23

Muni market pop

Following the lead of the big daddy of the bond market, U.S. Treasuries, municipal bonds moved up yesterday. From the Bond Buyer:

Muniland investors have been anticipating strong demand for new bonds being brought to market. Issuance has dropped dramatically, and generally this would create strong demand for new bonds. Massachusetts brought a bond deal yesterday that had a higher yield and lower amount than was anticipated. This is surprising since Massachusetts is a state with many high-income earners. Dow Jones reported:

The Commonwealth of Massachusetts on Tuesday sold a $ 469.8 million offering of general obligation municipal bonds via lead underwriter J.P. Morgan.

The deal size was $20 million smaller than initially planned. Randy Smolik, senior municipal analyst at Thomson Reuters, said the bonds came at yields that were slightly higher than expected, which raises questions about demand at a time of few new issues, and as muni bond funds prepare for a semi-annual period when coupon income necessitates reinvestment.

Happy Friday all!

Illinois passes landmark education reform

The Chicago Sun-Times reports that the Illinois state legislature has passed a substantial education reform bill. The legislation severely restrains the power of the teachers’ unions:

The measure continues to allow unions to strike in Chicago and the suburbs, but it imposes a requirement that school boards and unions take longer to negotiate and publicly disclose their bargaining positions before a strike can be launched.

In Chicago, no strikes could occur until as long as 120 days after the dispute goes to a special panel — and then, only if the Chicago Teachers Union has given a 10-day notice of a strike and has 75 percent of its bargaining unit members in agreement. Currently, a strike only requires a simple majority of everyone who votes.

Shopping for municipal bonds is tough.

Investors generally don’t know if the issuer is financially healthy or spiraling down to default. The media does not have useful data.

But the information is out there.

Towns and states, that issue municipal debt, are responsible to create thorough, audited documents such as annual financial statements and offering documents for new debt issues.

The Municipal Securities Rulemaking Board (MSRB) has a nice surprise coming for retail investors. It’s an expansion of the EMMA document repository system. And it will make bond shopping much easier.

American City and County reports on a wonderful photo campaign launched by the Association of Equipment Manufacturers (AEM) to highlight America’s crumbling infrastructure.

I predict the category “One bumpy road” receives a lot of submissions. Here is how it is described by the AEM:

Disintegrating roads are a fact of life for almost everyone. Some have even rewarded us with a flat tire or worse! Send a photo of a decaying bridge or road; show Congress the consequences of their inaction.

It’s Friday and America keeps chugging along.

We have no Federal budget, we are possibly shutting down the federal government and our national credit card is nearly maxed out.

And over here in muniland the road is still bumpy. Here is the sweep.

Municipal bond mutual funds continue to experience outflows, general obligation bonds interest rates tick up a little from slack demand and several Senators dust off an old, unpopular idea for taxation of muni bonds.

Transportation for America:    The Fix We’re In For: The State of Our Bridges

My fellow Reuters blogger Felix Salmon  wrote about his lunch with the bond fund managers Loomis Sayles yesterday.

Bond fund managers generally are not keen on self directed investors. They believe that they are the best managers of investors’ fixed income assets. And some of Felix’s blog post reflected that.

The darkness and complexity of bond markets has served bond mutual funds well.  Generally retail investors, unless they have high net worth and a knowledgable advisor or broker, tend to allocate the “fixed income” portion of their assets into bond funds.  This is unlike the equity markets, where many investors feel confident buying individual stocks.