FT Alphaville rather liked this comment from Barry Ritholtz on emerging signs (well, screaming fire alarms) of a US municipal junk bond bubble:
One of the factors that caused the great credit crisis to spread far and wide was the “reach for yield.” This is one of the most expensive ways a fixed income investor can obtain a higher potential return on their bond investments.
Note that I used the term “higher,” not “better,” and the word “potential,” not “actual.”As we have seen, high yielding junk paper often goes bust, making the yield grab an exercise in foolish futility. Thank goodness bond investors learned their lesson in the credit collapse of 2008-09.
Only not so much.
Indeed. The Bloomberg story Ritholtz riffs on has the full grisly details:
Investors in search of better returns poured $7.8 billion into high-yield municipal bond funds last year, pushing assets to a two-year high. They may start experiencing losses as early as this year as default risks grow…
…The risk of municipal-bond defaults in the future is “higher than it’s been in quite some time,” said Deutsche Bank’s [Gary] Pollack, because of the unprecedented stress on state and local budgets. From 1970 to 2009, the average five-year default rate was 3.43 percent for speculative-grade debt, Moody’s said. Harrisburg, the capital of Pennsylvania, has considered filing for reorganization under Chapter 9 of the U.S. bankruptcy code as it faces $68 million in debt.
High-yield municipal bonds have returned three times as much as their investment-grade cousins in the last year, according to the article.
But while it does quote bullish opinion on state and local governments’ ability to keep paying interest and principal on their debts… we note that much of that opinion comes from high-yield fund managers. Oh dear.
As it is, all this high-yield, sub-investment-grade almost makes California’s credit pariah status look like a source of ‘better, actual‘ yields, to paraphrase Ritholtz. And that’s quite an achievement.
Related links:
Dimon: We’ve hedged Greece. But California… - FT Alphaville
Muni investors still backing California bonds – FT Alphaville
Yields lure back Mom and Pop to muni bonds – FT
Build America pays off on Wall Street – WSJ