For retail fixed-income investors, there are three main approaches to owning municipal securities: buying actively managed mutual funds, buying individual securities and laddering them to mature at intervals (see explanation below), or buying municipal ETFs like BlackRock’s MUB.
I attended two events in the last few days that featured top muniland bond fund managers discussing the markets, and a theme that kept coming up was how the financial crisis had substantially changed muniland. In nearly identical language, three fund managers said the market has changed from a “rates” market — where trading and portfolio decisions were made based on interest-rate movements — to a “credit” market, where buying decisions pivot on the credit quality of individual bonds. This is a sea change for the business and has driven more demand for credit analysts in muniland. It has likely caused a growing reliance on official credit ratings among individuals and firms that can’t do credit analysis.
Recently the International Monetary Fund and David Wessel of the Wall Street Journal compared market dynamics for European sovereign bonds and U.S. municipal bonds. I suppose the thinking was that America is a developed fiscal union and could offer lessons to the less politically unified EU, but it’s an impossible comparison. Europe’s market for sovereign debt and the U.S. muni market have practically nothing in common except that they are composed of bonds and trade over-the-counter. They display idiosyncratic behaviors based on fiscal practices, market structure, securities ownership, market liquidity and their use as collateral at central banks.
Lots of excellent municipal bond market analysis is coming muniland’s way, and I’ll be sharing some of it through the end of the year. First up is Daniel Berger of Thomson Reuters Municipal Market Data, who makes an interesting point about the municipal bond yield curve. He notes that the 10-/30-year slope (or difference in yield on 10-year AAA bonds and 30-year AAA bonds) has rapidly steepened since August 1. Berger attributes this to the great performance of 10-year AAA bonds over that period. In a little over two months their yield has dropped from about 2.55 percent to under 2.00 percent. Investors are loving these bonds — it’s a full on “flight to quality.”
Here is a brilliant map from the Tax Foundation (via WPRI.com). The percentages on the map indicate the amount of each state’s annual budget that goes to pay off interest on their debt. Massachusetts leads the pack in this statistic with 9.58% of their budget going towards interest payments, much higher than the average. It’s important to note that this is not a map of relative ranking of debt loads as that would look quite a bit different and have California in the lead.
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:
Attention Muniland! Do you have an idea for a public web or mobile application? Change.org is sponsoring a Hack for Change on June 18th and 19th and is soliciting ideas for their programming competition. Here are some of the ideas that have already been posted:
Economic Musings has posted an excellent piece on “community development district” [CDD] bonds. CDD bonds, commonly called “dirt bonds,” were widely used to fund housing development infrastructure during the real-estate bubble. Needless to say, many have been hit hard due to the collapse of the housing market. Economic Musings outlines the legal and structural details of these bonds and then questions whether high-yield muni bond funds are accurately valuing the securities in their portfolio: