We hear that this year’s exodus from the US muni bond market by retail investors, nervous about the coming bond pain (from higher rates and Detroit nerves rather than predictions of default and disaster), has fixed income hedge funds dipping into the $4tn market.
Hence positive momentum for muni’s last week, which Citi declared was “swimming against the bond fund tide”. Read more
Here’s the City of Detroit’s filing to become the largest ever US city bankruptcy, filed late Thursday (seemingly timed to trigger a stay on imminent lawsuits by creditors). Beyond the list of derelict buildings and brownfield sites owned by the city — you’ll want to read the approval letter by Michigan Governor Rick Snyder, in Exhibit A. Read more
Every now and then, The New York Times takes a big ol’ swipe at derivatives for being evil and whatnot. That’s fine and well — and sometimes obligatory, particularly when it comes to certain structured products for which it’s hard to discern the benefit to anyone outside of a bank.
But it can all go awry when someone starts arguing against derivatives and just gets it wrong. It makes us do a sad, frowny face
and then get incredibly frustrated. Read more
Remember how Harrisburg filed for Chapter 9 bankruptcy?
Well, as we noted at the time, it’s important to be clear about what we mean by “Harrisburg”. A synechdoche is a slippery thing. Linda Thompson, the city’s mayor, on Monday requested an expedited hearing to try and block the city council’s bankruptcy filing. Read more
It started with an incinerator and ended with burnt fingers.
From Reuters on Wednesday morning: Read more
Dexia isn’t just a Franco-Belgian basket case; it’s your basket case too. And since there’s been a bit of talk about the link between the bank and the US muni market here’s our quick take.
As the FT’s Nicole Bullock reminds us, the bank is — or at least was — intimately involved with the municipal bond market. Read more
Following his not-so Grand Tour of Europe, the esteemed vagabond financial scribe Michael Lewis has returned home to report on California for Vanity Fair:
In our opinion, it’s not as perceptive as his articles on Greece or Ireland but it’s still worth an Instapaper click. Read more
That’s the great Aaa states of New Mexico, South Carolina, Virginia, Tennessee and Maryland, for those unfamiliar with US postal abbreviations.
Moody’s Tuesday action was forewarned last week when it placed the US sovereign’s AAA rating on review for possible downgrade. The credit rating agencies are busy at the moment, working out the consequences of any sovereign action on the thousands of securities directly or indirectly linked to the hub of the global bond market. Read more
Pity the municipal middle man.
Wednesday’s WSJ has an interesting article on covenants that banks are attaching to direct loans made to municipalities seeking refuge from the capital markets. (The Bond Buyer reported back in February on the move toward direct lending.) Read more
The big holes in Chinese local government balance sheets are back — and bigger than first thought, according to Moody’s.
As widely reported this morning, the rating agency reviewed the National Audit Office’s report on local government debt and concluded that it underestimates banks’ NPL exposure. Read more
US municipal borrowers are increasingly turning to private debt deals for funding, the FT reports, raising fears over hidden risks in public debt. Direct loans from banks and direct purchases of municipal securities by banks have enabled local borrowers to refinance billions of dollars of debt as public issuance has dropped. The value of the deals was not known and some analysts and market participants are worried that they are adding another layer of opacity to a market that has already been criticised for poor transparency.
The Los Angeles Times and the Bond Buyer have done some interesting reporting in the last three weeks, shedding light on a dark corner of the municipal markets: conduit bonds.
What are conduit bonds? Not for the first time, we recommend this post from Bond Girl, which describes how these bonds are different from both vanilla GO bonds issued by governments and from bonds secured by a defined revenue stream, say from a utility. In contrast, conduit bonds are private debts issued by governments or government-sponsored entities. In theory, governments judge that the public gain from the project is greater than the cost in lost tax revenue. Here’s more from Bond Girl: Read more
At long last, Scotland is to meet the capital markets.
Scotland is one of a rare breed of nations: it has its own legal system but lacks sovereignty. It’s also a fiscal outlier. Unlike sub-sovereign entities in the US, Italy and Australia (to name a few), it has little flexibility over taxation and is unable to issue bonds. Read more
Last week FT Alphaville noticed Citi’s claim to have “found” $775bn more municipal bonds in existence than had been previously assumed by most of the market.
The revised aggregate estimate ($3,700bn) came from an upgrade in the amount of holdings by retail and, to a lesser extent, foreign investors. Read more
The Lehman Brothers bankruptcy may be making it cheaper to buy default protection on US municipal bonds, the FT reports. The cost of CDS on “munis” has fallen sharply this year, a sign of a lower perceived risk that US states and cities will struggle to pay their debts. The MCDX, the municipal CDS index, this year has dropped by more than 30 per cent. CDSs on individual states such as California and Texas have fallen more than 40 per cent. But a 2007 deal between Lehman and Warren Buffett was confusing the situation by potentially dumping a large supply on the CDS market. The WSJ notes that while the exact timing of Lehman’s sale is unclear, some traders and investors say the mere prospect of such volume hitting the market has been a factor in driving down swap prices over the past month.
Nobody tell Meredith Whitney but municipal bond funds finally ended their 29 week run of outflows:
The things one finds underneath the sofa.
FT Alphaville typically estimates the size of the muni market at $2,900bn, based on year-end 2010 data from the Federal Reserve. The FT uses the same figure, occasionally rounding up to $3,000bn. Read more
Did you miss this whoppingly-important story out of China?
It seems quite a few people have. Reuters reported on Tuesday that China plans to shift RMB2,000-3,000bn, or $308-463bn, of debt off local governments, citing sources. The basic idea is to save the world economy (really) by reducing the risk of a wave of local government defaults in China. Read more
John Bellows, Acting Assistant Secretary for Economic Policy, has a post on the US treasury blog calling for the reintroduction of Build America Bonds. It’s quite interesting — honest.
Babs expired in December 2010, but the President’s FY2012 budget asks for their reintroduction. They were popular. There were 2,275 separate issues totaling $181bn, $30bn more than the total grants given to state and local governments also included as part of the Recovery Act. Read more
The Bond Buyer has a story on Thursday highlighting strong demand for tax-exempt municipal bonds, which despite recent tightening are still trading at above 100 per cent of comparable US Treasuries at the long end of the yield curve.
The “magic” 5% tax-free yield is sustaining strong demand from retail investors. Read more
The Bond Buyer’s Patrick Temple-West has an interesting article on Tuesday based on comments made Friday by the interim director of the IRS’s government entities bond office:
The Internal Revenue Service’s tax-exempt bond office has received referrals of around 30 whistleblower claims of potential abuses in the municipal bond market, an official said Friday. Read more
It’s not just the US sovereign that’s recently taken a credit beating.
A Moody’s report on US public finance rating revisions out Tuesday shows how the fiscal ripple effect continues to deteriorate credit conditions in US municipalities. This may not be big news to muni watchers, but there have been other reports out recently that are worth tying together. Read more
There’s been plenty of hurly-burly lately over forecasts of default rates in the municipal bond market.
But what of recovery amounts, should muni bonds default? Read more
On Friday S&P stressed its March 29 five-notch downgrade of the GO and appropriation-backed debts of DeKalb County, Georgia was “not the canary in the coal mine, but more the anomaly”.
But in a municipal market report also out on Friday, Citi is more sceptical about the nature of the proverbial bird and what it means for other US local governments and the credit outlook for some munis. Read more
The municipal bond market has calmed in the last two weeks as the flight from disaster ushers in a return to relatively safe havens.
But as two annual reports released by Moody’s on Thursday make clear, FY2011 and FY2012 could be when the financial crisis finally hits US state and local governments finances full whack. Read more
That’s what this chart, released on Friday by Citi’s municipal bond team, apparently suggests:
Municipal bonds, doctor doom will see you now.
The WSJ reports Wednesday that Roubini Global Economics analysts David Nowakowski and Prajakta Bhide estimate there will be about $100bn of muni bond “defaults” over the next five years. Read more
From Moody’s on Thursday afternoon, its report on public finance rating revisions in 2010:
Rating activity in 2010 provides further evidence that the municipal market faces credit pressure not seen since the Great Depression. Read more
From the WSJ on Wednesday afternoon, provisional details of Illinois’ delayed $3.7bn pension bond sale:
Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said. Read more