MuniLand

Muniland is shrinking

Muniland bond issuance is slowing, according to Thomson Reuters data. Year-to-date issuance through June was $176 billion versus $194 billion in the same period a year ago. Thomson Reuters broke down the data by the largest issuing states and region of the country above. The West, likely fueled by California, and the Southwest were the only regions that borrowed more this year than last. It would be interesting to map this against economic growth across the country.

 

This chart shows how municipal bond issuance for new money projects has remained steady at around $70 billion this year to date, while issuance to refund higher coupon bonds has slowed from $125 billion to $106 billion. As interest rates go up, refunding higher coupon bonds with new bonds slows refunding issuance. If interest rates continue to go up, this source of new issuance will likely shrink considerably.

There are many factors that are weighing on issuance, but the primary one is likely to be the high-rate environment. There are other factors like shrinking federal revenues due to sequestration and rising pension and healthcare costs for state and local governments. There has been more active pressure from rating agencies about future liabilities like pensions and a lot of uncertainty about the direction that Congress will take regarding capping the muni bond tax exemption.

The tone of muniland has changed from rosy bliss to a rocky road this last year. Detroit’s bankruptcy filing must have sent a chill down the spine of every municipal official. Intensifying short-term pressures include massive outflows from municipal bond mutual funds, which crimps their ability to be buyers in the primary market. It’s a stormy sea in muniland.

Muniland is shrinking. Pressures are weighing on issuers and much of their necessary funding can be deferred. It’s likely that muniland will continue to shrink.

Muniland, meet your issuers

 

Bloomberg’s Joe Mysak, whom I consider the king of muniland, had a delightful stream of consciousness via Twitter today about how little information he had to report from when he was a muni reporter in the 1990s. In one tweet he laments the lack of access to preliminary official statements for bond offerings. To get one, “you basically had to rely on spies,” he says.

Thankfully, those days are over. Official statements are in the public domain via a giant file cabinet called EMMA, which is maintained by the Municipal Securities Rulemaking Board. It’s muniland’s equivalent to the SEC’s Edgar system for corporate securities (actually it’s even more advanced).

The deafening roar has subsided

The recent sell-off in fixed income markets, led by the decline in U.S. Treasuries, was big by historical standards. Here the Federal Reserve Bank of New York compares past Treasury bond sell-offs with the most recent one. The recent rout was much deeper and more sustained than most in history.

If we drill down a little deeper into muniland, we see some interesting patterns. Using index data from Standard & Poor’s and Morningstar we can see how July and year-to-date losses compare for various classes and maturities of bonds:

Treasury bonds were hardest hit this year-to-date. Long-dated Treasury bonds had a loss of over 7 percent for the year. Short muni bonds squeaked out a small gain, while long munis suffered. Long corporate bonds fared slightly better.

The return of the bond vigilantes?

On Thursday, a small municipal bond deal for a Michigan county was postponed due to “lack of investor interest.” This is unusual, given the yield premium offered on the bonds. The Wall Street Journal has the story:

In the most tangible sign of fallout from Detroit’s bankruptcy filing, a Michigan municipality postponed a $53 million bond sale as investors blanched at the offered terms.

The Genesee offering didn’t attract enough buyers at a yield of 5.34 percent on a 29-year bond, the longest in the deal, according to people familiar with the offering. The average yield on a comparable 29-year municipal bond is 4.91 percent as of Thursday, according to Thomson Reuters Municipal Market Data.

Developing a new heartbeat for muniland

Trading bonds in muniland is a mess unless you have access to systems that provide information on current market levels for various types of bonds. It’s almost impossible to know, as a retail investor, if your bond purchase is close to a market level or if it is, in fact, marked up excessively. You are basically shooting in the dark and it’s probably best to just stay away from buying these bonds individually.

Institutional systems are very expensive to lease and are usually too pricey for retail investors. The Securities and Exchange Commission recommended in their two recent municipal market reports that investors be provided with more market data by the Municipal Securities Rulemaking Board, which oversees muniland. The MSRB already provides good access to prices for individual bonds that have already been traded. But those are old prices. Most individual bonds don’t trade on a daily basis, so it is hard to guess at current fair value levels. Municipal bond prices are also influenced by the daily rise and fall of the U.S. Treasury market, the same as most fixed income, which is anchored by the yield on the ten-year U.S. Treasury bond.

The MSRB announced last week that it would be publishing several requests for comments asking for more information so investors can make informed investment decisions. The Wall Street Journal ran a story following the MSRB press call that gives a glimpse into the regulatory struggle between the MSRB and the SEC on developing a set of pre- and post-trade pricing tools for retail investors. The SEC is leery of giving retail investors benchmarks that rely on data that is not based on actual trades. From the WSJ:

Muniland’s regulator hard at work

I heard an economics editor give an amusing response the other day when asked if the U.S. has “free” markets. She responded that, since all markets are regulated, that, pretty much, yes. I had to chuckle because municipal bond markets, although regulated reasonably-well on the primary side when bonds are issued, have minimal supervision or regulation on the secondary or trading side after bonds have been issued. It’s difficult to have confidence that investors are always protected when you read stories about abuses like excessive mark-ups, for example.

Listening to a press call with the MSRB (the municipal market’s overseer), after its quarterly meeting on Friday, I felt a jolt of enthusiasm. The board has been spending a lot of effort untangling the thorny issues that must be addressed to bring more transparency into primary and secondary municipal bond markets. Here is the MSRB’s priority list (my comments in parentheses):

Trade Reporting Concept Release: To support the MSRB’s ongoing commitment to increasing transparency in the municipal market related to pricing of municipal securities, the Board agreed to publish the second concept release in a series of releases on the MSRB’s existing transaction reporting system. The new concept release will seek public comment on improving the quality and usefulness of available post-trade information and the appropriate standards for the collection and dissemination of pre-trade information on the MSRB’s Electronic Municipal Market Access (EMMA®) website. (I can’t wait to see the details)

Buying bonds in muniland

When I started the Muniland blog in April, 2011, municipal bonds were being affected by a low interest rate environment, making them expensive and offering low yields to investors. Since non-institutional investors usually have to pay big mark-ups to buy them, it didn’t make sense to encourage people to own individual bonds. But the interest rate environment in the next year will be changing, and folks might want to consider good quality municipal bonds as long-term investments. It may start to make more sense that I talk about trading commentaries by muniland professionals.

One of the most-used benchmarks in muniland is the “Municipal-to-Treasury” ratio. Anthony Valeri writing for Learnbonds.com says:

Municipal valuations are at their most attractive levels of the past several years, according to average municipal-to-Treasury yield ratios. Average 10- and 30-year AAA municipal bond yields are 112 percent and 114 percent, respectively, of comparable maturity Treasury yields (using Municipal Market Advisors yield data) as of July 10, 2013. The higher the yield ratio, the more attractive municipal bonds are relative to Treasuries and vice versa. A ratio over 100 percent means that yields on top-rated municipal bonds are exceeding those of comparable Treasuries, and investors get the added tax-benefit to boot.

Is this an orderly process of tax reform?

Although there are people, like Bond Dealers of America CEO Mike Nicholas, who have predicted that federal tax reform will not happen until 2017, the Senate Finance Committee has kick-started the process. Law firm KL Gates sent out a primer about the Senate Finance Committee plans:

The momentum toward comprehensive tax reform accelerated significantly on June 27th, 2013, when the bipartisan leaders of the Senate Finance Committee, Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), sent their Senate colleagues a joint letter requesting Senators to submit their tax reform proposals by July 26th, 2013. [1] In doing so, Senators Baucus and Hatch are beginning to set the table for the Finance Committee to consider tax reform in the coming months. As discussed in our previous alert, the time to weigh in on tax reform is now.

Senate Finance Committee members Senators Max Baucus and Orrin Hatch have asked all senators for their tax reform wish lists:

The Yankees parking lots that went bankrupt, skipped city payments and took city land

 

Bond Buyer Publisher Mike Stanton, (@MikeStanton1891)  and I were slugging it out on Twitter after I tweeted that the Yankee Stadium parking garage bonds were likely one of the most corrupt muniland deals ever.

I might have said this because the bonds had defaulted. Or because the $238 million of bonds were unrated. Or it might have had something to do with the issuer of the bonds, the Bronx Parking Development, being a couple working out of their home in Hudson, New York, who had defaulted on two previous municipal bond deals structured in the very same way. Or maybe I said this because, in the event of a default, the deal allowed the bondholders to take control of extremely valuable public land and convert it to use for private gain. This fourth explanation actually prompted my opinion of the deal.

Who is earning tax-exempt interest from muni bonds?

About one third of the U.S. House of Representatives signed a letter to keep the current tax exemption for municipal bonds in place. Investment News got the story:

The municipal bond market’s dogged efforts to prevent President Barack Obama from tinkering with the 100-year-old tax exemption for muni bond income has received some high-profile support from 137 members of Congress.

A letter supporting the status quo for the muni tax exemption, and signed by 95 Democrats and 45 Republicans, was delivered today to Speaker of the House John Boehner and minority leader Nancy Pelosi.

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