MuniLand

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.

The 43 basis-point extra yield on the deal seems to be a nice premium for the uncertainty that surrounds Michigan’s bonds in light of Detroit’s bankruptcy filing. But investors remained on the sidelines. It begs the question of whether we are seeing a new round of bond vigilantes. The traditional definition for a bond vigilante is:

A bond market investor who protests monetary or fiscal policies they consider inflationary by selling bonds, thus increasing yields.

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.

Muniland gets a data boost

The Federal Reserve Bank of New York has begun publishing data about the bond holdings of its primary dealers. Primary dealers are the largest and most active trading groups in bond markets. This new data will add a lot to our understanding of market flows.

The primary dealer banks own less half than 1 percent of outstanding municipal bonds, or $17 billion for the week ending June 19, 2013. The amount of municipal bonds outstanding is $3.7 trillion.

According to MSRB’s EMMA data system, the average daily trade volume by par amount for the last thirty days for municipal bonds is $12 billion. Dealers are holding about 1.4 days’ worth of trading volume. The big dealers traded $8.8 billion of securities for the week of June 19, controlling about 73 percent of daily muniland trading.

It may get easier for retail investors to buy bonds

Muniland’s oversight organization, the Municipal Securities Rulemaking Board, has proposed some new rules to the SEC that may make it easier for retail investors to buy bonds that are newly brought to market.

The dealers who underwrite bond offerings tend to favor their institutional and high net worth clients, so typically retail investors have a difficult time getting an early part of the pie. In fact, the issuer would often prefer that their bonds be placed with retail investors, because they tend to be the most stable owners as buy-and-hold investors.

The MSRB’s new measures would strengthen the retail order period. The first would establish specific obligations on the senior syndicate manager to disseminate detailed information about the terms and conditions of any retail order period. Whatever terms the state or local government has set for retail investors to be able to buy bonds must be provided to all the dealers in the selling group (on a large deal this could be up to 15 or more dealers). It sounds simple, but it doesn’t always happen.

The high cost of borrowing for Illinois

Illinois, the state with the lowest credit in the United States, had to pay up this week to bring a $1.3 billion general obligation bond offering to market. Reuters reported that the general obligation bonds due in 25 years were priced at 5.65 percent on Wednesday. This was approximately 180 basis points (1.80 percent) over Thomson Reuters MMD AAA, compared to a spread of 138 basis points on Tuesday. In other words, Illinois got spanked hard.

Illinois has massively unfunded public pensions and a huge stack of unpaid bills that make the state less creditworthy and force it to pay higher interest rates when it borrows. But a new study by the Mercatus Center suggests that, since the risk of default for Illinois is very small, the state is overpaying for its bond offerings. The study’s author, Marc Joffe, formerly a Senior Director at Moody’s Analytics, developed a fiscal simulation model that takes into account pension, education and health care payments over time in addition to debt service:

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