| 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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| 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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Next ‘Big Crisis’ Is Unfolding in Muni-Bond Market |
Commentary by Joe Mysak
April 9 (Bloomberg) -- Look to municipal bonds for the next big disaster.
That’s the advice of Richard Bookstaber, a senior policy adviser at the Securities and Exchange Commission.
Writing on his blog this past week, Bookstaber said the next big crisis looked a lot like the last big crisis, in housing and credit.
Conditions in the municipal-bond market match almost exactly the conditions that existed for the blowup that sparked the worst recession since the Great Depression, he said.
I would agree with him up to this point. What he then predicts seems rather unlikely to happen.
The muni market is leveraged and opaque, in terms of pension obligations. It is a big market, and problems can “go systemic,” he writes. Much of the tax-base, things like toll revenue, is already mortgaged. Once a few municipalities default on their debt, “there is a risk of a widespread cascade because the opprobrium will be lessened.”
Finally, those investors who seek salvation in geographic diversification may be disappointed, just as those in the housing market were. That’s “because similar methods of leveraging were being employed throughout the country.”
Bookstaber is a serious, smart fellow, a hedge-fund and Wall Street securities firm veteran. What he says can’t be dismissed as the usual headline-grabbing bloggery hysteria.
Los Angeles, Detroit
Bookstaber also works for the SEC. So he may have some special insights (he noted that his blog post is his personal opinion and not the views of the SEC or its staff).
As if to punctuate the man’s arguments, the city controller of Los Angeles this week said it might go broke in a month; the mayor called for nonessential services to be shut down for two days a week. The Citizens Research Council of Michigan, an independent research organization, released a report on Detroit, and said it might be helpful if the city reorganized under bankruptcy protection.
There’s a lot of bad stuff going on in Muniland right now. Because tax revenue tends to lag behind economic recovery, there’s more gloom on the horizon. The question for bond buyers is whether “things can go systemic,” as Bookstaber puts it.
I don’t think so.
Nor do I think that bond investors are well-served by ignoring the imminent perils their market has to navigate. Perhaps I have received one too many e-mails from readers complaining that I somehow do a disservice to the municipal market by publishing facts about unfunded pension liabilities, rising default rates, and public officials who are looking into the possibility of Chapter 9 bankruptcy.
Default Record
Still, systemic? Really? What would that mean? The $2.8 trillion municipal market is enormous. First there’s the number of governmental units, including things such as school districts and authorities: 89,526 at last count, which was in 2007. There are probably more today.
So how would you quantify “systemic” default? If we say only half of the governments sold bonds, that’s about 45,000. The figure is probably higher, though, because so many small issuers sell bonds once every few years.
Is systemic, then, 10,000 defaults? Maybe it’s 20,000? The record year in recent history for defaults was 1991, when 259 bond issues either failed to make debt-service payments or violated covenants, according to the Distressed Debt Securities newsletter of Miami Lakes, Florida.
During the Great Depression, from 1930 to 1939, 4,770 municipal-bond issues defaulted, according to George H. Hempel’s book “The Postwar Quality of State and Local Debt” (1971). More than 60 percent occurred in the South or the Midwest.
Inconsistent Condition
I don’t buy the idea of a mass meltdown. The municipal market is too specific and too particular. It resists categorization and generalization.
Not all states and localities are alike, when it comes to their budgets or pension liabilities. Some are on the brink, others are courting disaster, and still others are managing. Tax revenue and investment returns are already coming back.
What will we see instead? It will be bad enough. There will be more defaults, yes, and possibly a few high-profile bankruptcies that will shock the system. The really bad news will probably be concentrated in a number of states, the same way most of the housing collapse was.
The best thing about these “crisis” calls is that they focus states’ and municipalities’ attention on their pension shortfalls and their intractable public labor unions.
The backlash against ever more lavish public pensions has begun, and it won’t be pretty.
Click on “Send Comment” in the sidebar display to send a letter to the editor.
--Editors: David Henry, Steven Gittelson.
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
To contact the editor responsible for this column: David Henry at dhenry2@bloomberg.net
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