MuniLand

Year-end in muniland, part 1

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.”

Berger next gives us a snapshot of flows in and out of municipal bond funds. After a very rough beginning to the year it looks positive going into year end:

Muni bond funds posted about $1.04bln of net inflows for the week ended December 7, according to data released on Thursday by Lipper. This was the biggest inflow since March 10, 2010, when investors put $1.13 billion into the funds. The latest week’s inflows were a sharp turnaround from the almost $298mln of outflows seen in the prior week, which was the first negative reading in seven weeks.

The four‐week moving average remained positive atabout $344mln. From early November 2010 until June 8, 2011, muni funds recorded 29 consecutive weeks of outflows. Since then,the fund flows have been mixed (but generally positive), posting inflows for seventeen weeks and outflows for eleven weeks.

And lastly, he looks into historical default data for municipal bonds:

During 2011, America Airlines (AA) accounted for $3.4 billion of muni defaults while Tobacco bonds had $16.9bln of defaults. Combined, AA and the tobacco bonds comprised slightly more than 87% of municipal bond defaults. Even though the volume of defaults has risen (and may continue to rise due to the presence of $50bln of outstanding Tobacco Bonds) we do not believe that there are systemic problems within the muni market. While there will be some strain among municipal issuers there will not be “hundreds of billions” of defaults that were forecast by doomsayers with little knowledge of municipal finance. We forecast that state and local governments will have less than $10bln of defaults during 2012.

Found: $840 billion in municipal bonds

The Federal Reserve has quietly admitted they had undercounted about $840 billion of municipal bonds. Bloomberg reports on this new pile of assets:

The U.S. municipal-bond market is 28 percent larger than reported in June, according to a quarterly Federal Reserve release, which used new data showing individuals own more state and local-government debt.

[...]

“The estimate of household holdings of municipal securities and loans is revised up by about $840 billion, on average, from 2004 forward,” according to the Fed’s Flow of Funds Accounts report for the third quarter.

Foreigners want America’s public assets

It seems like foreign governments and corporations are craving U.S. public assets like toll roads, electrical grids and railways. In the case of our largest creditor, the Chinese government, they don’t want any more U.S. Treasuries, but they do want to own the hard assets that comprise our nation’s infrastructure.

Reuters Beijing bureau reported:

China may channel part of its huge pool of foreign exchange reserves into investment in U.S. infrastructure, including rail and transportation networks, Commerce Minister Chen Deming said on Friday.

“China is unwilling to take on too much U.S. government debt. We are willing to turn that money into investment,” he told U.S. Ambassador to China Gary Locke and U.S. businessmen.

Reading the muni CDS tea leaves

I saw a strange tweet this morning that said “State CDS blew out yesterday per Bloomberg. Not sure what I missed here.” The anonymous tweeter attached the image above of graphs of credit-default swaps for 9 big states. Notice the very sharp one-day spike for every state except Ohio. Those spikes mean that those who trade muni CDS suddenly thought U.S. states were riskier, by anywhere from 2.09 percent to 17.02 percent, in one day. That is a big gap up.

Municipal CDS reference the equivalent cash bonds of the obligor. So a NY10Yr CDS references New York State general obligation bonds that mature in 10 years. CDS and cash bonds use different units of measurement but generally move proportionally to each other. So if investors no longer want New York State general obligation bonds and their price declines, one would usually see the CDS sell off too.

But municipal cash bond markets didn’t sell off yesterday. You can see in the Thomson Reuters Municipal Market Data chart below that New York State general obligations have been trading pretty steady recently. There certainly wasn’t a 17 percent drop yesterday like there was in the NY10Yr muni CDS. What’s going here?

The Fed’s data snafus

Most everyone knows that the Federal Reserve Board is responsible for making monetary policy, handling prudential oversight of many of the nation’s banks and keeping the clearing and payment system flowing. But the Fed has another fundamental function that often goes unnoticed: collecting financial and economic data.

Good policymaking flows from having fresh and accurate data. From my little experience with the Fed they are not doing very well at this task.

Reuters is reporting that Fed Governor Elizabeth Duke believes that household debt has declined since the financial crisis of 2008 and that this reduction in household balance sheets will position families to participate in the recovery when conditions tick up. From Reuters:

A drought of municipal bond issuance

All year long, muniland has been dragging its feet on issuing bonds. Budgets have been much too constrained to take advantage of historically low interest rates. At the end of the third quarter of 2011 issuance was 39 percent lower than 2010, according to Thomson Reuters SDC data. Nine-month issuance for 2011 was $160 billion versus $262 billion for the same period last year.

It’s a veritable drought.

Harrisburg has more than incinerator debt

The current bankruptcy drama in Harrisburg, Pennsylvania is just the third act of a long running effort to make the city something more than a corridor for those who commute into the city for work. Most of the current debt problems of Harrisburg stem from failed projects intended to revitalize the city and extremely bad business decisions.

The chart above shows the massive increase in Harrisburg’s population that occurred up to 1950 then starting falling steeply since mid-century. The city’s population was actually smaller in 2010 than it was in 1900. It’s just one of many American cities that has seen its vitality and population fade away.

Almost all the news coverage now is focused on the current players and their attempts to use the law to bend events towards their vision of the future. For example, the mayor, the county and the state are petitioning in bankruptcy court to halt the actions of the city council who filed for Chapter 9 bankruptcy. The bankruptcy judge will sort out these claims in an emergency court hearing on Monday. It’s high drama and makes for great journalism.

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.

The calmest seas you will ever see

Low issuance, low defaults and low rates

For issuers, conditions are just about perfect in muniland now. Many have defered or withdrawn planned bond offerings, leading to greatly reduced supply for the year. Bloomberg estimates that 3rd quarter total issuance will be about $67 billion. This follows the $117 billion in muni securities issued in the first half of the year (data from SIFMA, Excel file link). Through Q3 Billions 2010 $ 298 2011 $ 184

Defaults have also been puttering along at very, very low rates. This is due to some creative workout solutions, like Jefferson County’s negotiations with creditors, and many instances of postponement of problems, like Collingswood, NJ. I’ve seen estimates for total defaults for the year ranging from $1.8 billion (this number included unrated bonds) to $1.1 billion. Bloomberg says:

Municipal defaults have dropped this year to about $1.1 billion, a quarter of last year’s total, according to Bank of America Merrill Lynch. Local general- obligation bonds have accounted for only 1 percent of the 2011 failures [balance is revenue or conduit bonds].

More Whitney rebuttals

The media is full of municipal bond market participants rehashing Meredith Whitney’s prediction of muni collapse which began last September. From Bloomberg:

[Meredith] Whitney, the banking analyst who predicted Citigroup Inc.’s 2008 dividend cut, said on “60 Minutes” on Dec. 19, 2010 that there would be “hundreds of billions of dollars” of municipal defaults within 12 months.

Data from [John Hallacy, Bank of America Merrill Lynch’s head of municipal research in New York], Standard & Poor’s and Municipal Market Advisors show the opposite.

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