| Bonds Online |
 |
|
| 5/10/2013Market Performance |
| Municipal Bonds |
|---|
|
S&P National Bond Index
|
3.00% |
|
|
S&P California Bond Index
|
2.96% |
|
|
S&P New York Bond Index
|
3.13% |
|
|
S&P National 0-5 Year Municipal Bond Index
|
0.70% |
|
|
| S&P/BGCantor US Treasury Bond |
400.09 |
|
| More |
|
| Income Equities: |
|---|
| Preferred Stocks |
|---|
|
S&P U.S. Preferred Stock Index
|
848.03 |
|
|
S&P U.S. Preferred Stock Index (CAD)
|
636.26 |
|
|
S&P U.S. Preferred Stock Index (TR)
|
1,701.05 |
|
|
S&P U.S. Preferred Stock Index (TR) (CAD)
|
1,276.26 |
|
|
| REITs |
|---|
|
S&P REIT Index
|
174.07 |
|
|
S&P REIT Index (TR)
|
425.30 |
|
|
| MLPs |
|---|
|
S&P MLP Index
|
2,469.58 |
|
|
S&P MLP Index (TR)
|
5,428.50 |
|
|
See Data
|
|
|
|
 |
|
|
|
|
|
|
Municipal Derivative Mythology Turns on 500 Swaps |
Bloomberg - Nov. 25, 2009 - by Joe Mysak
States and municipalities used a lot fewer derivatives than we thought.
Why everyone with an interest in public finance was led to believe that swaps mania was rampant says a lot about the conflicted and murky nature of the market.
Those issuers that engaged in the swaps game are now getting out of it, often with a great deal of pain, in the form of multimillion-dollar payments to investment banks. The local governments among them are doing so at the same time their tax revenue has dropped off a cliff, unemployment is rising, and property values -- and assessments -- are falling. There’s a very good reason that most analysts say the default rate, now less than 1 percent, is going to rise.
The damage is bad enough.
Let’s take a look at the numbers. There are 89,526 state and local governments, including public school systems, in the U.S., according to the Census Bureau’s 2007 Census of Governments (released every five years). In any given year, states and municipalities offer about 10,000 bond issues.
And now the most surprising number of all. How many have done swaps? Just 500.
In October, Moody’s Investors Service produced a report on how the financial crisis was affecting municipal-bond issuers with variable-rate debt and swaps.
That’s All?
“When the credit market disruption began two years ago, we embarked on a comprehensive review of all Moody’s rated state and local governments with variable rate debt and swaps,” Moody’s said on Page 7. “We have since reviewed all of the approximately 500 issuers in this group.”
Hold it right there: 500?
After almost two decades of nationwide, frenzied marketing by bankers who said that everybody was doing it, that’s all?
The size of the swaps and derivatives market has always been one of the great mysteries of public finance.
“Market participants have suggested that the market is between $100 billion and $300 billion, annually, in notional principal amount, but until these derivative transactions are formally tracked, the figure will be unreliable,” the Municipal Securities Rulemaking Board said in a report published in April.
This report, on unregulated municipal market participants, seems to have been a desperate bid to retain some relevance for the market’s self-regulatory organization.
Inflated Estimates
To be sure, that single sentence is remarkable. What it says is: We can’t possibly estimate how many muni swaps and derivatives there are, and because the only way we can try is by using the industry’s own inflated estimates, please don’t take them seriously.
Now why do you think that is?
This wasn’t the first time that market participants tried to gauge municipalities’ use of swaps and derivatives. No, that occurred back on July 30, 2007, when Standard & Poor’s published a report that said it had completed 750 “Debt Derivative Profiles” since it began tracking the use of swaps by municipal-bond issuers in September 2004. Only 255 were state or local governments.
I thought this was a pretty small number compared with the hype I had heard about these things, and wrote a column about it. I received a barrage of e-mail from angry bankers and financial advisers, all of whom counseled me that S&P was wrong, the market was much bigger than that, and that obviously S&P had missed happy swaps users by the boatload.
No Update
S&P never seems to have updated that report, by the way. I wonder why.
What might the real number be? The rating companies report only on the issuers they grade. They don’t rate all the issuers that sell bonds. There’s a lot of overlap between the two major companies.
So let’s say there’s no overlap. That means 1,250 municipal-bond issuers have engaged in swaps and derivatives. Let’s say both rating companies missed some users. How many? 250? 500? 550? Let’s be generous and say 550. That brings the grand total of issuers who have used derivatives to 1,800.
That’s not a very big number at all, compared with the almost 90,000 local governments out there, is it? You can see why bankers were licking their chops in 2002, 2003 and 2004, when it looked like more and more issuers were getting comfortable, finally, with the concept of swaps.
Tainted Love
I’m not the only one who bought the hype about these things. Earlier this month, the New York Times, in an article on Jefferson County, Alabama, reported with some confidence, “Over the last decade, thousands of governments around the country entered into deals linking bonds with derivatives, forming complex structures that were supposed to hold down borrowing costs.”
The reason for the mismatch between the perception and the reality is that it was in nobody’s interest, except the public’s, for the truth to be told.
The bankers who pushed these things so aggressively, because they could charge whatever they wanted for them, sought to reassure conservative public officials that they weren’t doing anything that everyone else wasn’t doing. All the other parties to the transaction, with a few rare exceptions, got in line if they wanted to feed at the trough.
If there’s no deal, remember, nobody gets paid.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
Click on “Send Comment” in the sidebar display to send a letter to the editor.
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
|
|
|
|
|
|
| Partner Market Place |
|
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
S&P Commentary and Newsletters: S&P
|
|
| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
Unsubscribe here [+] |
|
|
|
|
