In the past month the municipal bond market has gone through quite a metamorphosus. In mid December the sky seemed to be falling. But as long rates rose to year long highs, investors stepped in to buy munis. The keys seemed to be the end of the treasury bond slide, Harvard University(Aaa, AAA, AAA) 30 year paper trading at 5% and expectations of a good retail reinvest in January. In the next few days Harvard bonds rallied back to a 4.60 level and MMD followed from a 4.84 to a 4.66 over three trading sessions. But the week after Christmas led to a small sell off due to lack of participants thus less liquidity. It only took a few days after the new year to make the street realize that any interest from retail was still on the short end of the curve and the rally not only sputttered but as bid lists from institutions popped up the rout was on. Since the end of BABs became a fait accompli, the market has grown concerned over future supply and the ability to chew through it all in a reasonable fashion. It is now a reality.
In steps the new municipal finance expert, Meredith Whitney. In her interview on 60 Minutes she expressed her concerns about possible large scale muni defaults in the coming year. Not just large scale but HUNDREDS OF BILLIONS OF BONDS (rather impossible ). After this interview, munis , which usually put financial writers to sleep due to it's laconic nature, came to be the lead story in every financial report whether in print or on television. Every market pundit on the news shows was asked about muni bonds and their safety. Never mind none of these people had a deep background in the area. So the storm grew to outsized proportions. When Whitney's muni piece came out in the fall, several muni asset managers called her and offered to pay the purported $100,000 price for her voluminous report. She declined. When asked by asset managers and then by Andrew Sorkin of CNBC which municipalities would be high on her list of defaults, she demurred. To quote an old Texas expression"Big hat --No cattle" to describe her. On the CNBC show this past week both Becky Quick and she called BABs "Buy America Bonds" --so much for good investigative journalism and research.
Meredith also said that due to Michigan's restructuring of it's debt to longer maturities that they have defaulted !! So if you took advantage of redoing your mortgage this year , you have defaulted... check your credit scores! It is fairly obvious that she does not understand what an advance refunding is. Here are some quotes from Whitney's interview on 60 Minutes on 12/19/2010:
"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.
Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
And when discussing rating agencies:
"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.
Here is the full script about munis on 60 Minutes.
The CNBC interview this past week finds her stumbling through some of her statements. But what I find most annoying, but is a CNBC trait, is CNBC's need for the headlines and no regard to possible mistruths. Why didn't they invite Bill Gross from Pimco, which probably has more financial analysts on staff that are more erudite on municipal finance , or another well known municipal deity to be across the desk and ask her more questions or rebut her statements? It is these one view looks that send shivers up the public investor's spine. As the week progressed they did interview more people ( John Miller of Nuveen and Mohamed El - Erian of Pimco to name a few) who basically said that there will be some defaults as there are every year but this is an opportunity to buy very good credits at great ratios to government bonds at this stage (see below). Also noted was the fact that these pundits very much disagreed with Whitney's conclusions as to the amount of defaults. A bit late probably. Just remember CNBC still denies it had anything to do with the tech bubble in 1990-2000.....Well enough of being Walter Winchell for the day, let's get back to markets.
This past week started with some trepidation concerning the 2 sizable deals in the market: $875mm NYC Transitional Finance Authority (TFA) (Aa1/AAA/AAA tax supported debt) and $1.9bil NJ Eco Dev Auth for school facilities, a refunding issue of short term debt and swaps ( oops default) (Aa3/AA-/AA- state appropriated debt). As stated above, the market has been nervous about supply after BABs were terminated. Well if last week's performance was any indication, it will be a long year for issuers. With the dearth of long end buyers (TOBs, Hedge funds, cross over buyers, et. al.) since the 2008 meltdown, the long end of the market has struggled at times to perform well vis a vis the shorter end even in the rush to low rates. See curve analysis below. Not only did both deals have to adjust scales to higher levels to get done, NJ had to lower the amount it borrowed to just under $1billion. Just a bit too many bonds to swallow. Along with the lack of buyers on the long end of the market, bond funds have been getting record redemptions for the past 2 months. Add to the mix that the cost of LOCs that are expiring( letters of credit) used on VRDNs has skyrocketed from 5-10 bps when written 3 - 5 years ago to 125 bps and higher in order to renew. Some of this short paper will undoubtedly have to be remarketed further out the curve putting more pressure on fixed rates and at the same time cause a dwindling of short supply for money market funds and keeping short rates low. More curve steepening??
Muni / Treasury ratios Aaa MMD vs Treasuries as of 1/14/2011
5 yr 97.5% normally 70-75%
10 yr 104% normally 78-83%
30 yr 112% normally 88-93%
Muni yield curve 2yr to 30 yr
6/15/2007 70 bps
6/15/2008 233 bps
6/15/2009 372 bps
11/15/2010 380 bps
12/12/2010 404 bps
12/12/2010 404 bps
01/14/2011 433 bps
Going forward the February through May time frame has historically unkind to the rates markets. Look for demand for munis to continue to be soft versus supply and very volatile markets in the near future. A big challenge coming up will be the State of illinois Pension Obligation Bond (POB) taxable deal coming in mid February, Tentative structure is $3.7 billion from 1-8 years. With all the problems the state has been encountering, this will be a mammoth task for the management group to accomplish. The managers will leave no stone unturned in looking for buyers for this debt. Morgan Stanley, Goldman Sachs and Loop Capital are the co senior managers.
The bright light for municipal issuers is the pick up in tax receipts from 2009 to 2010. if this continues this will surely help in toning down the rhetoric about defaults. Nothing new here that major service cuts , pension reform, worker contracts and higher taxes and / or usage fees seem to be in all of our futures.
One last hysterical note: Donald Trump is now advertising his own name brand mattress through Serta!! Does this guy have any shame??
No comments:
Post a Comment