Harrisburg, the capital of Pennsylvania, is planning to default on a $3.29 million payment for municipal bonds in two weeks. The incident would be the secondlargest
municipal bond default in 2010. Harrisburg's bond insurer is expected to cover the payment, but the situation is expected to fuel investor concern about the municipal bond market.
Showing posts with label municipal bonds. Show all posts
Showing posts with label municipal bonds. Show all posts
Wednesday, September 1, 2010
Tuesday, July 27, 2010
Regulatory reform will affect municipal and corporate bonds differently
The overhaul of financial regulation will affect corporate bonds and municipal bonds differently, partly because corporate bonds are registered securities. That difference is meaningful as market participants work to unravel the law and its
unintended consequences, according to CNBC.
unintended consequences, according to CNBC.
Thursday, July 8, 2010
Mid-Year Update: Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way.
Equities of all persuasion saw mid-year losses after a first quarter surge.
MARKET RETURNS
Year-to-date (1/1/10-07/02/10)*
Dow Jones Indus Avg. -7.38%
S&P 500 -8.44%
NASDAQ -7.96%
Russell 2000 -4.23%
MSCI World Index -11.33%
DJ STOXX Europe 600 -6.55%
Year-to-date (1/1/10-07/01/10)
90 Day T-Bill 0.09%
2-Year Treasury 1.46%
10-Year Treasury 5.91%
ML High Yield Index 2.79%
JPM EMBI Global Diversified 5.40%
JP Morgan Global Hedged 4.42%
Year-to-date (1/1/10-07/01/10)
U.S. $ / Euro (1.26) -11.9%
U.S. $ / British Pound (1.52) -6.2%
Yen / U.S. ($ 87.74) -5.7%
Gold ($/oz) ($1,210.68) 10.4%
Oil ($72.01) -9.3%
*Returns reported as of 9:15 a.m. Pacific Standard Time
What accounts for the second quarter downturn?
Various theories are being put forward.
One is that corporations are pulling pro fits forward into 2010 to avoid the higher taxes coming in 2011. Yes, it is still possible to manipulate earnings despite Sarbanes-Oxley, you just have to be smarter than before.
Another possible reason for the decline is the fear of a double dip recession starting early next year. This is supported in part by numerous factors including robbing 2011 results by the earnings manipulations described above, expiration of the Federal economic stimulus (yes, even bad stimulus has some effect on the economy) and uncertainty arising from the fallout expected from the financial reform legislation now pending in Congress and the actual fallout from the health care legislation.
Finally, there is the expectation that corporate earnings and competitive position internationally will be negatively affected by the higher corporate tax rates
in 2011. The often repeated mantra that ‘the more you tax something the less of it you get’ is running into opposition by the Obama administration which is more concerned with ‘fairness’.
Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way. Fairness should be addressed on the spending side of the ledger. To mix the two politicizes revenue raising and invites special interests to corrupt the taxation process with social engineering thereby doing greater harm to the economy.
Individual investors have still to be heard from since they are expected to take profits on their holdings before year-end to avoid higher tax rates.
Such individuals may well opt to sit on the cash proceeds from such tax sales until the outlook clarifies. This will only add to short term market weakness.
Despite the fact that Congress seems to be playing a losing hand, they seem unlikely to change course before the November elections.
Should the Democrats lose control of the House of Representatives, we can expect a major market rally since a stalemated Congress would be a welcome relief for the markets.
This may be short lived, however, since a lame duck Congress may well try to finish their agenda before leaving office (think carbon tax or a VAT). In short, equities don’t look promising between now and November and don’t look all that great for next year.
A healthy position in cash and gold still look like safe bets.
Interest Rate Outlook
At mid-year we see ten year Treasuries below 3% and thirty year Treasuries below 4%.
What would possess an asset manager to buy 30 year Treasuries with a locked in yield of 4% when the outlook for inflation over the next few years promises to make this a loosing proposition if not a disastrous one?
The only answer I can devise is fear and special situations.
Fear by those who have gotten burned in the financial crisis and therefore consider credit risk in the short term more important than market risk over the longer term.
Special situation buyers include insurance companies who are matching long term
payout commitments on annuities with the interest payments on the Treasuries.
Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short term loans at 25 basis points. It is this group who represent the greatest threat to the interest rate outlook since they
will unload their positions en masse the moment they see a turn in rates.
This is why I feel an interest rate rise will come suddenly and not be dependant on actual inflation. It may in fact be a cause of the inflation.
Considerable media attention has been given to the municipal bond market in recent weeks.
We see yields on ten year AAA munis going from 3.91% at year end 2008 to 3.25% at year end 2009 to 3.13% at mid-year 2010.
Much of this decline is due to the high demand for tax free munis by individual investors in high tax states as well as generally, given the pending tax rate rises in 2011.
The decline in muni yields is also influenced by the continued perception that munis are safe because they have always been so. This perception is due some re-evaluation.
Municipalities have rarely faced the kind of budget pressures they are experiencing today because of the revenue declines resulting from the recession. Added to this is the retirement of government employed baby boomers, whose pension liabilities have gone mostly unfunded.
This is an increase in current expenditures which is not discretionary and growing rapidly. It promises to create a budget crisis at the city and county level since these entities now face a cash expense they can no longer ignore.
Warren Buffet, who rushed into the bond insurance business during the financial crisis has since backed away. He notes that in the coming budget crunch, municipalities will likely stiff insurers or bondholders before firing employees. Bankruptcy filings may also prove to be more palatable politically than cutting services.
In any case, don’t think that past history is the best indication of what the future holds for municipal bonds.
Thanks to Richard Lehmann at incomesecurities.com and Payden & Rygel [paydenrygel@payden.com]for the data tables
MARKET RETURNS
Year-to-date (1/1/10-07/02/10)*
Dow Jones Indus Avg. -7.38%
S&P 500 -8.44%
NASDAQ -7.96%
Russell 2000 -4.23%
MSCI World Index -11.33%
DJ STOXX Europe 600 -6.55%
Year-to-date (1/1/10-07/01/10)
90 Day T-Bill 0.09%
2-Year Treasury 1.46%
10-Year Treasury 5.91%
ML High Yield Index 2.79%
JPM EMBI Global Diversified 5.40%
JP Morgan Global Hedged 4.42%
Year-to-date (1/1/10-07/01/10)
U.S. $ / Euro (1.26) -11.9%
U.S. $ / British Pound (1.52) -6.2%
Yen / U.S. ($ 87.74) -5.7%
Gold ($/oz) ($1,210.68) 10.4%
Oil ($72.01) -9.3%
*Returns reported as of 9:15 a.m. Pacific Standard Time
What accounts for the second quarter downturn?
Various theories are being put forward.
One is that corporations are pulling pro fits forward into 2010 to avoid the higher taxes coming in 2011. Yes, it is still possible to manipulate earnings despite Sarbanes-Oxley, you just have to be smarter than before.
Another possible reason for the decline is the fear of a double dip recession starting early next year. This is supported in part by numerous factors including robbing 2011 results by the earnings manipulations described above, expiration of the Federal economic stimulus (yes, even bad stimulus has some effect on the economy) and uncertainty arising from the fallout expected from the financial reform legislation now pending in Congress and the actual fallout from the health care legislation.
Finally, there is the expectation that corporate earnings and competitive position internationally will be negatively affected by the higher corporate tax rates
in 2011. The often repeated mantra that ‘the more you tax something the less of it you get’ is running into opposition by the Obama administration which is more concerned with ‘fairness’.
Taxation should be about raising the maximum amount of revenue for the government in the least economically disruptive way. Fairness should be addressed on the spending side of the ledger. To mix the two politicizes revenue raising and invites special interests to corrupt the taxation process with social engineering thereby doing greater harm to the economy.
Individual investors have still to be heard from since they are expected to take profits on their holdings before year-end to avoid higher tax rates.
Such individuals may well opt to sit on the cash proceeds from such tax sales until the outlook clarifies. This will only add to short term market weakness.
Despite the fact that Congress seems to be playing a losing hand, they seem unlikely to change course before the November elections.
Should the Democrats lose control of the House of Representatives, we can expect a major market rally since a stalemated Congress would be a welcome relief for the markets.
This may be short lived, however, since a lame duck Congress may well try to finish their agenda before leaving office (think carbon tax or a VAT). In short, equities don’t look promising between now and November and don’t look all that great for next year.
A healthy position in cash and gold still look like safe bets.
Interest Rate Outlook
At mid-year we see ten year Treasuries below 3% and thirty year Treasuries below 4%.
What would possess an asset manager to buy 30 year Treasuries with a locked in yield of 4% when the outlook for inflation over the next few years promises to make this a loosing proposition if not a disastrous one?
The only answer I can devise is fear and special situations.
Fear by those who have gotten burned in the financial crisis and therefore consider credit risk in the short term more important than market risk over the longer term.
Special situation buyers include insurance companies who are matching long term
payout commitments on annuities with the interest payments on the Treasuries.
Other special situation players would be hedge funds playing the carry trade game where they buy these Treasuries with short term loans at 25 basis points. It is this group who represent the greatest threat to the interest rate outlook since they
will unload their positions en masse the moment they see a turn in rates.
This is why I feel an interest rate rise will come suddenly and not be dependant on actual inflation. It may in fact be a cause of the inflation.
Considerable media attention has been given to the municipal bond market in recent weeks.
We see yields on ten year AAA munis going from 3.91% at year end 2008 to 3.25% at year end 2009 to 3.13% at mid-year 2010.
Much of this decline is due to the high demand for tax free munis by individual investors in high tax states as well as generally, given the pending tax rate rises in 2011.
The decline in muni yields is also influenced by the continued perception that munis are safe because they have always been so. This perception is due some re-evaluation.
Municipalities have rarely faced the kind of budget pressures they are experiencing today because of the revenue declines resulting from the recession. Added to this is the retirement of government employed baby boomers, whose pension liabilities have gone mostly unfunded.
This is an increase in current expenditures which is not discretionary and growing rapidly. It promises to create a budget crisis at the city and county level since these entities now face a cash expense they can no longer ignore.
Warren Buffet, who rushed into the bond insurance business during the financial crisis has since backed away. He notes that in the coming budget crunch, municipalities will likely stiff insurers or bondholders before firing employees. Bankruptcy filings may also prove to be more palatable politically than cutting services.
In any case, don’t think that past history is the best indication of what the future holds for municipal bonds.
Thanks to Richard Lehmann at incomesecurities.com and Payden & Rygel [paydenrygel@payden.com]for the data tables
Allstate CEO Says State Borrowing 'Out of Control
This should be no surprise to you, dear reader. “Nobody has the intestinal fortitude to actually move forward to try to change anything,” CEO Wilson said of government debt at the federal, state and local levels. “They’re just sort of sitting there waiting for disaster to happen.” And disaster is exactly what they're going to get.
Read the whole story here:
http://www.bloomberg.com/news/2010-07-07/allstate-ceo-says-government-borrowing-out-of-control-munis-may-suffer.html
or just click on the headline above
Read the whole story here:
http://www.bloomberg.com/news/2010-07-07/allstate-ceo-says-government-borrowing-out-of-control-munis-may-suffer.html
or just click on the headline above
Wednesday, June 30, 2010
Municipal Bonds..a bargain or a huge risk waiting to swat you?
The following are excerpts from a Bloomberg article (link above)
Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months.
Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data.
Financial pressure on states and municipalities has built as revenue fell in the wake of the recession. More than two- thirds of states had a drop in revenue last quarter over the same period in 2009, the Nelson A. Rockefeller Institute of Government said this month. States will have confronted $296.6 billion of budget deficits from 2009 to 2012, the National Governors Association and National Association of State Budget Officers said.
Municipal bonds underperformed U.S. Treasuries in the first half as default speculation drove state and local government yields to the highest level relative to government bonds in 13 months.
Ten-year municipal bond yields rose to 100 percent of Treasuries for the first time since May 2009, from 80 percent six months ago, according to Municipal Market Advisors data.
Financial pressure on states and municipalities has built as revenue fell in the wake of the recession. More than two- thirds of states had a drop in revenue last quarter over the same period in 2009, the Nelson A. Rockefeller Institute of Government said this month. States will have confronted $296.6 billion of budget deficits from 2009 to 2012, the National Governors Association and National Association of State Budget Officers said.
Wednesday, March 11, 2009
Muni & Corporate bond Comments 3/11/09
The treasury market continued its selloff yesterday, while Muni's and Corporates are both cheapening in price, widening in spread.
The Muni market hit a wall about two weeks ago, spreads have been widening versus the MMD scale ever since. Supply in the muni market has also been very robust, with 7BB worth of New Issues coming in each of the last few weeks.
In the high tax states, 10yr Ma State GO has widened over 25 BP's, now trading at +35 to scale.. NY City GO's have widened about 30, now trade +155 over the MMD.. Cal is trading +150 these days, but that widening took place earlier.
Corporate Bonds, which had tightened at a torrid pace from November thru mid February have slid recently
In both sectors, the market had moved too far, too fast. Take advantage of these back ups. The recession will pressure both sectors from a credit perspective, but diligent selection will provide great opportunities. Quality Investment Grade Bonds yielding 4 to 7.5% make great sense, and Muni's will be in greater and greater demand over the next few years as inevitably State and Federal Tax Rates rise.
In Agency Securities, the FDIC Insured Corporate Bond sector continues to explode in size. The market has now grown to over 100BB, since its initial issuance in November. These bonds have NO CREDIT RISK, as they carry the governments Full Faith and Credit backing.. 2 year bonds trade at 70 Basis Points over Treasurys @ 1.70% 3 year Bonds @ 80 Over Treasurys or 2.20%... More than ever, FNMA FHLMC and FHLB will be leaned on by the government to help resolve the Mortgage Crisis, and I reckon that credit risk in those entities is miniscule. Bonds with at least 1 year of call protection are the best value.
LIQUIDITY FOR SECURITIES THAT ARE IMPAIRED REMAINS AWFUL. In credit, there are MANY MANY MULTIPLES OF SELLERS of AIG and its entities International Lease Finance, and American General, HSBC, Citigroup, Bank America, Merrill Lynch, Prudential, Genworth Financial, Hartford Insurance, Ford, and GMAC FOR ANY BUYER... CPI Floating Rate Notes, and Bill Based Floating rate notes also struggle to find a Bid Side..
The large global Financial Issues (1BB+ in size) which in previous years would have a daily trading volume of 30-40mm Bonds per day, in today's market might only trade a few million, sometimes much less on a given day.
In Municipal's, bonds that have only insured ratings, and/or weak underlying ratings are also a struggle to sell. In my opinion, the market has had a structural change with the losses of a number of large brokerage company balance sheets, and the liquidation of so many levered hedge funds..In the past, these were the buyers of last resort, who could be counted on providing a "down" bid..but it was liquidity nonetheless.
On the flip side, keep in mind that quality paper in any sector will have a decent bid, in even poor market conditions. In Muni's, that means Hi Quality State, County and City GO's and essential purpose revs.. In Corporates, companies that have solid investment grade ratings, and good cash flow.
The banking crisis and the economy will still be down for longer than anyone wants to believe.
The Muni market hit a wall about two weeks ago, spreads have been widening versus the MMD scale ever since. Supply in the muni market has also been very robust, with 7BB worth of New Issues coming in each of the last few weeks.
In the high tax states, 10yr Ma State GO has widened over 25 BP's, now trading at +35 to scale.. NY City GO's have widened about 30, now trade +155 over the MMD.. Cal is trading +150 these days, but that widening took place earlier.
Corporate Bonds, which had tightened at a torrid pace from November thru mid February have slid recently
In both sectors, the market had moved too far, too fast. Take advantage of these back ups. The recession will pressure both sectors from a credit perspective, but diligent selection will provide great opportunities. Quality Investment Grade Bonds yielding 4 to 7.5% make great sense, and Muni's will be in greater and greater demand over the next few years as inevitably State and Federal Tax Rates rise.
In Agency Securities, the FDIC Insured Corporate Bond sector continues to explode in size. The market has now grown to over 100BB, since its initial issuance in November. These bonds have NO CREDIT RISK, as they carry the governments Full Faith and Credit backing.. 2 year bonds trade at 70 Basis Points over Treasurys @ 1.70% 3 year Bonds @ 80 Over Treasurys or 2.20%... More than ever, FNMA FHLMC and FHLB will be leaned on by the government to help resolve the Mortgage Crisis, and I reckon that credit risk in those entities is miniscule. Bonds with at least 1 year of call protection are the best value.
LIQUIDITY FOR SECURITIES THAT ARE IMPAIRED REMAINS AWFUL. In credit, there are MANY MANY MULTIPLES OF SELLERS of AIG and its entities International Lease Finance, and American General, HSBC, Citigroup, Bank America, Merrill Lynch, Prudential, Genworth Financial, Hartford Insurance, Ford, and GMAC FOR ANY BUYER... CPI Floating Rate Notes, and Bill Based Floating rate notes also struggle to find a Bid Side..
The large global Financial Issues (1BB+ in size) which in previous years would have a daily trading volume of 30-40mm Bonds per day, in today's market might only trade a few million, sometimes much less on a given day.
In Municipal's, bonds that have only insured ratings, and/or weak underlying ratings are also a struggle to sell. In my opinion, the market has had a structural change with the losses of a number of large brokerage company balance sheets, and the liquidation of so many levered hedge funds..In the past, these were the buyers of last resort, who could be counted on providing a "down" bid..but it was liquidity nonetheless.
On the flip side, keep in mind that quality paper in any sector will have a decent bid, in even poor market conditions. In Muni's, that means Hi Quality State, County and City GO's and essential purpose revs.. In Corporates, companies that have solid investment grade ratings, and good cash flow.
The banking crisis and the economy will still be down for longer than anyone wants to believe.
Monday, February 2, 2009
High yield bonds
High yield taxable bonds started off the year with a bang, generating a total return of 5.99% (752 bps of excess return).
We are starting to see investors reaching for yield again which is somewhat troublesome to us and we advise caution in high yield.
In the municipal space, total returns were solid and when you factor in the tax benefits clearly outpaced most of their fixed income brethren. Our theme of quality underperformed as a bevy of recent press articles about how “cheap” municipal bonds are drew in the lemmings. Here too we advise caution. It is my belief that the strains in the municipal market are much more severe than anything in the recent past and a period of above average defaults can not be ruled out.
We are starting to see investors reaching for yield again which is somewhat troublesome to us and we advise caution in high yield.
In the municipal space, total returns were solid and when you factor in the tax benefits clearly outpaced most of their fixed income brethren. Our theme of quality underperformed as a bevy of recent press articles about how “cheap” municipal bonds are drew in the lemmings. Here too we advise caution. It is my belief that the strains in the municipal market are much more severe than anything in the recent past and a period of above average defaults can not be ruled out.
Subscribe to:
Posts (Atom)