| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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‘Bond Heaven’ Defies the Disasters in Munigeddon |
Commentary by Joe Mysak
March 10 (Bloomberg) -- Buy me while you still can.
That’s what the municipal bond market is telling investors. It’s also telling them not to fret about state and local economies, beset as they are by budget deficits, pension shortfalls and rising health-care costs.
Of course, this market doesn’t speak in English, but in numbers. Sometimes, such as when tax-exempt bonds yield double their U.S. Treasury counterparts, the numbers shout. More often, and in the present case, they imply and infer.
What is the municipal market saying when the Los Angeles Unified School District borrows money for 10 years at 3.54 percent, or Seminole County, Florida, does the same for 3.49 percent, or the town of Rye, New York (a natural Aaa credit from Moody’s Investors Service) pays 2.93 percent?
California, Florida and New York are all looking at oceans of red ink right now, and for the foreseeable future. The market says: Don’t worry about it.
These aren’t isolated examples. Every week, hundreds of municipalities sell bonds. It’s business as usual. The Bond Buyer’s 20-General Obligation Bond Index, the oldest gauge of what it costs these places to borrow money for 20 years, is 4.34 percent, well below its average for the last 10 years of 4.79 percent, and within calling distance of its recent record low of 3.94 percent. That rate, not seen since the days of U.S. President Lyndon Johnson’s administration, was reached in 2009.
There has rarely been a better time for a municipality to borrow money. That’s a good thing because they will need it.
It’s Munigeddon
The news is bad. The headlines are worse, especially on the blogs, where a mixture of misinformation and hysteria typically holds sway. California is Greece! All the states are going bust! It’s Munigeddon!
Let me repeat: The news is bad. I can’t remember when it was ever worse, in terms of tax revenue and investment returns falling, and defaults rising.
Add to that the refusal of public officials to fire government employees and instead contemplate Chapter 9 municipal bankruptcy; labor unions digging in their heels; the Department of Justice’s investigation into anticompetitive practices among dealers; and now a Capitol Hill proposal to do away with tax- exempt borrowing altogether.
It’s not surprising that some people are starting to think the municipal market resembles the trailer for last year’s movie called “2012.” You may remember it: Actor John Cusack is racing his car ahead of a convulsive suburban landscape.
Scarce Commodity
The municipal market isn’t a disaster movie. There are no terrific explosions. States and localities rarely go out of business. They muddle through.
The municipal market isn’t the stock market. With equities, bad news has a real minute-by-minute impact. Yet here we are in the depths of Munigeddon, and it’s business as usual. One of the reasons for that is because municipal bonds are relatively inert within a few weeks after they are first sold. As the old municipal-market axiom has it: All bonds go to bond heaven. They are tucked away in safe deposit boxes until they mature or their owners are called.
The biggest reason tax-exempt yields are declining even in the face of bad news by the barrel is because there are fewer tax-exempt bonds. Tax-exempt, fixed-rate issuance fell 6 percent to $39.2 billion during the first two months of this year from the comparable 2009 period, based on Bloomberg figures. Taxable offerings, driven by the Build America Bonds program, were almost 16 times as plentiful, at $19.1 billion, the data show. Public offerings of the BAB subsidy deals began in April 2009.
It’s a simple matter of supply and demand. The issuers are selling more taxable bonds because the government’s 35 percent subsidy makes it cheaper for them to borrow that way than in the tax-exempt market. And the government aims to extend the BAB program, and expand other ones that would replace exemptions with tax credits. Even if Senators Ron Wyden and Judd Gregg go nowhere with their overhaul of the tax system, the tax-exempt market is dying a slow death. One way or another, the federal government will kill it off.
The scarcity premium trumps the hysteria discount.
--With assistance from Jeremy Cooke in New York. Editors: David Henry, James Greiff.
-0- Mar/10/2010 02:00 GMT
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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