| 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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Is Illinois Worse Off Than Greece? |
In early 2008, I warned my readers that several states and municipalities in this country are going to run into some very rough times, with the spectre of default definitely on the table for a few. See Municipal bond market and the securitization crisis – part I and Municipal bond market and the securitization crisis – part 2 (should be read by whoever is not a muni expert – this newsbyte may be worth reading as well).
Of course, the highly contrarian nature of my views were (and are) bound to bring about its fair share of naysayers, pointing to the sparse record of actual municipal defaults. Of course, we all know the safety of driving forward while staring in the rear view mirror, California creating its own currency in the form of IOU’s and all… I also brought up the risks that the CDS market posed in Counterparty risk analyses – counter-party failure will open up another Pandora’s box (must read for anyone who is not a CDS specialist). This was done right about the time that I also called several companies out for their CDS (and direct) exposure to real estate, mortgage debt and municipalities – namely:
Bear Stearns: Is this the Breaking of the Bear? (months before the collapse, while the company was trading in the $180s, the sell side still had buy ratings and the rating agencies had high investment grade stamps on it)
Ambac (Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility) – which also had investment grade ratings, trading in the $80 range,
MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton), ditto above;
and Assured Guaranty (Reggie Middleton on Assured Guaranty).
I considered three of the four to be insolvent in 2007 and early 2008. History has shown whether I had a point or not. I rehash history because a review of the lessons that hurt so bad, but were never learned brings us back to the muni markets, CDS and overleveraged exposure. Is this 2008, 2010, or some non-descript chrono-anomaly from a Twilight Zone episode?
Illinois Municipal Debt Defies Gravity
As municipal debt issuance continues to drop alongside yields, Chicago and Illinois continue to issue debt despite their deteriorating credit ratings and negative outlooks. Even as rates for AAA tax exempt borrowers have fallen, statewide issues from budget shortfalls, unemployment a full percent above the national average, and most importantly for the municipal bond market, declining state revenues have started to drive Illinois credit spreads wider than the poster child for state profligacy, California. Recent headlines have made it clear that state services in this fifth largest of the US states are under pressure.
Illinois Budget Crisis Draining State Services: Bloomberg
State retirement liabilities are near $130 billion, Illinois holds the country’s largest pension and health care funding gaps
Pension debt is $90 billion, and programs are unfunded to the tune of $54 billion
The state’s unpaid bills have risen by $1 billion in the past year
Chicago Downgrade Raises Borrowing Costs Amid $164 Million Sale: Bloomberg
Chicago is planning a multibillion dollar education capital plan, which it will debt finance
Chicago has continued to thin out its cash reserves, and when faced with firing 1,200 public school employees, it instead chose to let the good times roll (party like its 2005)
Recent credit ratings downgrades may have raised the debt financing cost by 40%
Illinois Pension Continues to Borrow From Future: Sun Times
In January of this year, Illinois raised $3.5 billion in five year pension obligation notes at a tax free rate of 3.84%, most of the funds going to the Teachers Retirement System (TRS)
The pension fund usually reinvests the some of the proceeds from the bond sale into financial markets to try and beat the 3.84% interest rate, however, in 2009, the TRS fund lost 22%, even as the S&P 500 strengthened by 26%
The pension system has reached an endpoint where simply cutting future benefits will not be enough to get out of a fatal debt spiral
And Yet, Illinois Bond Spreads Tighten: WSJ
Even with Illinois public debt being issued on a negative outlook, foreign markets ate up the Build America Bond offering at only 325 basis points over 30 year treasury yields
Analysts claim foreigners are opting for Illinois municipal bond over Greek government bonds (why own either?) See our take on the Greek situation:
Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
The state is in its worst cash position in its 200 year history
For the complete article visit Seeking Alpha
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| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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