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The Collapse Of The Muni Bond Market

Tyler Durden's picture


With most investors' eyes glued to equities and corporate bonds, and to a much greater extent, US Treasurys, many are ignoring the storm clouds gathering over the traditionally much more boring, income oriented municipal bond market. A recent research piece by welling@weeden covers most of the question marks vis-a-vis the muni market, although with proclamations such as "the municipal market will probably repeat the pattern of the sub-prime collapse. Although it is plain to see, the usual experts do not notice. This was true of all of our recent financial bubbles, including subprime mortgages" the paper's message may not be too welcome to the $3 trillion+ muni market. For all readers who enjoyed Sprott's recent outlook on the inevitable US debt repudiation, this is a must read report.


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Wed, 10/28/2009 - 14:41 | Link to Comment curbyourrisk
curbyourrisk's picture

thanks for PDF format!


Wed, 10/28/2009 - 14:43 | Link to Comment credittrader
credittrader's picture

MCDX13 +11bps to 105bps today!!! tightest to IG in weeks...should Munis trade through the high quality corporates of IG13?

Wed, 10/28/2009 - 14:46 | Link to Comment Yankee
Yankee's picture

Just pay your taxes, not to worry.  Short some NYC bonds, we've been around these blocks for 30 years or more now.  Who gives a shit, they have been told, they have seen so many times, there is always money under the municipal rug.  Big pensions in some shit hole in CA, who cares.  NYC nonsense who cares.

Wed, 10/28/2009 - 14:48 | Link to Comment Mad Max
Mad Max's picture

Bought a muni bond fund in early 2008 to get 2.5% returns when that was difficult... sold it in December 2008 on the expectation that municipal bankruptcies would be starting shortly.  Obviously I sold earlier than necessary, but this analysis suggests my idea was right.  (Yes, timing is everything, yes yes.)

I should have become a town supervisor for some stupid wealthy suburb that didn't realize it was massively overpaying its employees!

Don't miss Mish's post today on Houston being bankrupt.

So when exactly does the wave of municipal bankruptcies start, and what ugly politics will be revealed in that wave?

Wed, 10/28/2009 - 14:59 | Link to Comment Miyagi_san
Miyagi_san's picture

around here there shutting off the street lights...OT.. pelosi will announce heathcare bill tommorrow,  I think that GDP # is a setup for a beat 

Wed, 10/28/2009 - 14:53 | Link to Comment chunkylover42
chunkylover42's picture

Wait, I'm confused.  Moody's and S&P both said my muni bonds are AAA-rated. 

Wed, 10/28/2009 - 15:48 | Link to Comment Stuart
Stuart's picture

Given what we now know about Moody's and S&P's complicity in the MBS fraud, why would anyone ever again listen to these two corrupt organizations.  

Wed, 10/28/2009 - 14:55 | Link to Comment lizzy36
lizzy36's picture

Ravitch Says States Face Total Deficits of $500 Billion in 2011

I believe that the states across the United States will face deficits a year after stimulus ends of $300 billion to $500 billion a year,” Ravitch told about 200 people gathered at New York University’s Robert F. Wagner Graduate School of Public Service. “You’re going to begin to see cracks in the municipal bond market well before then, because that’s an inexorable casualty of unfundable state deficits.”

Wed, 10/28/2009 - 14:58 | Link to Comment Anonymous
Wed, 10/28/2009 - 15:04 | Link to Comment mule65
mule65's picture

Is WOPR down?

Wed, 10/28/2009 - 15:22 | Link to Comment I need more cowbell
I need more cowbell's picture

WOPR only works on low/no volume days. He be lazy.

Tomorrow will be sehr interessant, meine fruende. The GDP leak was:

a) to lower expectations, so we grind lower today rather than swoosh manana and scare the children

b) lower expectations, to set a bear trap, when anything north of 2.7 is bally-hooed like your first son being born with two dicks

c) the boyz are already short, and wanted to jump start the festivities

d or, an infinity of other shit

Wed, 10/28/2009 - 19:23 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

WOPR called in sick and spent the entire day on Zero Hedge chat making eyes at Marla and dissing Cheeky.

Or was it the other way around?

Wed, 10/28/2009 - 15:22 | Link to Comment Edna R. Rider
Edna R. Rider's picture

The most hilarious thing I read all day (the part about the Fed):  Contrary to opinion, the stock market will embrace a tightening monetary policy, says Jeffries & Co. chief strategist Art Hogan. Rather than seeing higher corporate borrowing costs, he says, investors will know the moves are coming because of positive economic signals: "The Fed has a pretty good picture of the economy, and can usually see around the corner."

Wed, 10/28/2009 - 16:24 | Link to Comment Takingbets
Takingbets's picture

ROTFLMAO! Just like they were able to see and contain subprime.

Wed, 10/28/2009 - 16:35 | Link to Comment bonddude
bonddude's picture

Hogan's thinking with his "bottom."

Wed, 10/28/2009 - 15:44 | Link to Comment Careless Whisper
Careless Whisper's picture

Munis collapsing, CRE collapsing, home prices tanking more, dollar... gonzo.

And now the violence begins.

Not happy with your loan mod? HIRE SOME MUSCLE and go after your banksta:



Wed, 10/28/2009 - 15:30 | Link to Comment Bam_Man
Bam_Man's picture

But, but, but those Muni bonds that are not AAA-rated are INSURED though.

What's there to worry about?

Wed, 10/28/2009 - 16:48 | Link to Comment agrotera
agrotera's picture


Wed, 10/28/2009 - 19:25 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

If they keep up with these lies, I might just have to hold my breath until I turn blue. That will straighten them out good.

Wed, 10/28/2009 - 15:41 | Link to Comment zarrmax
zarrmax's picture

It really depends on the bond deal but to say that the muni market as a whole is going to collapse is wrong. Of course if inflation comes & interest rates rise, bond prises will fall but that's a normal function of the security.

 Most investors wrongly assumed the stability and integrity of the investment and ran away from CA munis last year. Each bond is different and you need to read the documents but CA G.O.s are second in line for payment (behind education). Arnold & Co. are fighting over line itmes 350-400... I'm number 2... no credit risk there.

On the other hand, a G.O. for a dirt district that never got off the ground is a shoe in for BK.... but then again, anyone who knows muni's knows this and won't touch these bonds. HY junkers rule that space....

I can see the states are in trouble but munis have one BIG advantage over others... they can raise taxes.

Wed, 10/28/2009 - 15:56 | Link to Comment Mad Max
Mad Max's picture

Legally, they can raise taxes.  As a political and practical matter, I am more skeptical.  The Iowa issues noted in the article came from a conservative farm state in a time of civility.  Look at how Congresscritters freaked out over extremely mild protest at town hall meetings and anticipate how local politicians may react when faced with their own neighbors and past supporters yelling scary things at them in a local meeting.

Municipalities and most other public issuers (other than states) can declare bankruptcy.  This may be increasingly attractive when the alternative is viewed as scary by the local politicians.  Imagine the reaction of most people if told that their property taxes were being raised to 42.5%, as apparently once happened (article).  Concerns over reelection would be replaced with concerns over fleeing to safety, I suspect.

Wed, 10/28/2009 - 16:26 | Link to Comment zarrmax
zarrmax's picture

As a disclaimer, I have not read the article ( I'm going to read it tonight).

You make good points and while I agree that local issuers can file BK and this might be a route, the likelihood is small that they actually do file. Ad Hocs and creditors will pow-wow and work an alternative, sustainability is the name of the game and completely different from a distressed corp. (See Icahn/ CIT). There's no corp raiders in muni land (in the traditional sense). Although I admit that in order to get to this point, the muni in question is in trouble the real question is if the bonds will still pay.

Case in point: Vallejo, CA filed in 2008
The bonds never missed a payment. The reason they filed was to get out from their civil contracts with police,firemen etc. (Like I orginally said, line items #350). I think the real problem is the excess gov. spending. Vallejo was paying firemen $150k per year which sounds ridiculous but I can tell you when your house is on fire you don't want the guy who was the lowest bidder going in to get your child. If states did away with "special interests" programs, aka. friends of friends, most municipalities and states would be ok.

Wed, 10/28/2009 - 16:37 | Link to Comment Mad Max
Mad Max's picture

Zarrmax, you sound like you know this area and I look forward to a more detailed post after you read the article.  I only deal peripherally with muni bonds and never with distressed bonds, so I'm no expert.  My main point is that between the visceral impact of local tax increases and the abrogation of centuries of law in the GM and Chrysler "bankruptcies," I no longer assume that laws are going to be applied in the way written or intended.

Wed, 10/28/2009 - 16:58 | Link to Comment zarrmax
zarrmax's picture

Agreed... what a cluster fuck GM & Chrysler were... thank god I didn't trade those names regularly. I did invest with play money in GM but only after the BK. My cost basis for GM is in the low teen's which should work out....:)

Wed, 10/28/2009 - 16:40 | Link to Comment bonddude
bonddude's picture

Additionally, Vallejo school GOs which are reported to be in tech. default will continue to pay. the issue was something about the routing of funds through state accounts or some such.

Wed, 10/28/2009 - 16:48 | Link to Comment bonddude
bonddude's picture

When that first bad selloff hit last year and people were dumping their bonds to meet margin calls and funds were dumping to meet selling there were STUPID good deals 7-9% on money good Cal Smaller district paper. God that was fun. Could happen again. Got to understand the nature of the taxes or revenue streams behind them.

Wed, 10/28/2009 - 17:09 | Link to Comment zarrmax
zarrmax's picture

It could happen again but the likelyhood is low. The real crash in muni's happened not because of individual margin calls or fund redemptions but because Lehman dumped their muni book on the market. This drove prices down to the point of "crash" alone, the margin calls and redemptions where part of the velocity. There was a point where I said no bid on everything passing up G.O.'s yielding 10% + for quality credits.

Wed, 10/28/2009 - 18:09 | Link to Comment bonddude
bonddude's picture

Not to be disagreeable but it couldn't have just been that. There were hundreds of millions in odd lot bid lists (pieces under 250M/even 10-50m indicates piecemeal institutional and retail) and lehman just wasn't a player in the sizes and credits I was seeing. I would say that while you might be right about Lehman as they were dumping all assets, so was anyone else trying to raise cash. Remember it was a domino effect. It lasted about 1 1/2 months at the bottom.

Thu, 10/29/2009 - 08:45 | Link to Comment zarrmax
zarrmax's picture

I don't dispute there were hundreds of millions of odd lot bid wanteds. As we all know, retail does not move markets, institutions do. The big liquidations came first, moving the market way outside the normal trading range. This one-off, "six-sigma event" is what caused the market to initially crash. Retail literally woke up a week later to find their "super safe, super steady" munis that they used as margin collateral for their day trading accounts were down 20 points and they couldn't cover the call. This is what I meant by velocity. They were forced to sell everything into an already down market. I aggree this was a domino effect, I just think the big domino fell first.

Thu, 10/29/2009 - 09:02 | Link to Comment bonddude
bonddude's picture

Just think if they let the bigger dominos, ms etc. . Things would have gotten crazy cheap.


Wed, 10/28/2009 - 21:16 | Link to Comment Anonymous
Thu, 10/29/2009 - 08:51 | Link to Comment zarrmax
zarrmax's picture

I'm not here to give investment advice.... just be careful.

Wed, 10/28/2009 - 15:50 | Link to Comment Anonymous
Thu, 10/29/2009 - 11:39 | Link to Comment Anonymous
Wed, 10/28/2009 - 15:53 | Link to Comment chet
chet's picture

Time for a jubilee across the board.  Mark it ALL zero.

Wed, 10/28/2009 - 16:22 | Link to Comment Chumly
Chumly's picture

I second that motion.

Ahem, Mr. Chairman, we move to bring this vote before the full committee.

Wed, 10/28/2009 - 18:03 | Link to Comment Green Sharts
Green Sharts's picture

Wipe out the savers and let the borrowers off the hook.  Sounds like the ultimate destination of government policy since Alan Greenspan became Fed chairman.

Wed, 10/28/2009 - 15:56 | Link to Comment chunkylover42
chunkylover42's picture

welcome everyone to the next great bailout.  a lot of federal money is about to go to the states, further usurping their power at the expense of washington.  play nice or else, they'll be told.

he who controls the purse strings has the power.

Wed, 10/28/2009 - 16:08 | Link to Comment Miyagi_san
Miyagi_san's picture

Stimulus 2 ... save the teachers union...The kids will be bright but wont have a future.

Wed, 10/28/2009 - 16:33 | Link to Comment Mad Max
Mad Max's picture

I've been told, privately, by a former economist for my state's government that there is an inverse correlation between teacher pay and student outcomes.  I can also tell you that Detroit Public Schools have high pay by any measure and their quality is below abysmal.  I personally went to one of the best funded districts in my state and still got mediocre teachers.  I would have been better off at a Catholic school where teacher pay is 20-40% less but teachers care and students pay attention.

Wed, 10/28/2009 - 16:03 | Link to Comment BetterOffDead
BetterOffDead's picture

Nothing a little ink and paper won't fix.  States will bail out cities and towns with BB paper received from the government.  Lookout for the Term Municipal Securities Lending Facility, coming to a town near you.

Wed, 10/28/2009 - 16:09 | Link to Comment Anonymous
Wed, 10/28/2009 - 16:10 | Link to Comment Anonymous
Wed, 10/28/2009 - 16:35 | Link to Comment Mad Max
Mad Max's picture

This is so crazy and asinine that it's probably dead-on.  We're far down the rabbit hole and still digging.

Wed, 10/28/2009 - 16:12 | Link to Comment Dixie Normous
Dixie Normous's picture

Anyone have a cheap way to short this mess.  Appears most of the ETFs have no options


Wed, 10/28/2009 - 18:04 | Link to Comment Anonymous
Wed, 10/28/2009 - 16:18 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

"Today, no matter what one's reason for owning municipal bonds, these are speculative investments."

So is holding cash today...what a sorry state of affairs.

Wed, 10/28/2009 - 16:23 | Link to Comment HarrisonBergeron
HarrisonBergeron's picture

I think I am going to be sick.

Wed, 10/28/2009 - 16:48 | Link to Comment bugs_
bugs_'s picture

Houston we have a problem!

Wed, 10/28/2009 - 16:51 | Link to Comment Anonymous
Thu, 10/29/2009 - 11:35 | Link to Comment jm
jm's picture

Real interest rates are the real risk.

When CPI really caves, the interest burden on these poor bastards is going to cause many defaults, repudiations, and interest reductions.

With gov't as involved as it is now, courts will cave to political pressure.  Game over creditors.


Wed, 10/28/2009 - 17:09 | Link to Comment gookempucky
gookempucky's picture

Break out the cat urine--I feel a heavy metal trip coming..

Wed, 10/28/2009 - 17:31 | Link to Comment dza
dza's picture

And, for bonus points, what's the notional value of the Oracle of Omaha's (mr "weapons of financial mass destruction") credit default obligations on the municipal bond market? 16 billion. with a "B" billion. Sixteen of them.

Wed, 10/28/2009 - 17:39 | Link to Comment Gunther
Gunther's picture

If I remember the last two years correctly, the story goes like this:

A market that nobody ever talked about made headlines. The headlines were bad. The market froze up.  All efforts to get the market going again failed. 

Repeat with the next less-risky market...

Wed, 10/28/2009 - 19:10 | Link to Comment Anonymous
Wed, 10/28/2009 - 19:46 | Link to Comment johngaltfla
johngaltfla's picture

I do remember writing and commenting on this in my usual sarcastic manner in February of 2008 in a piece titled "Municide" and boy did the muni pumpers hammer me over that one. I'll simply repeat one part of it:


Pension plans, conservative investors, and many millions of other souls have piled billions of dollars into supposedly safe, insured and low-yielding municipal bond funds. The idea that the valuations of these instruments changing in a drastic manner never even crossed the minds of anyone (well exclude myself and a few others), as there seemed to be a huge gap in the River of Denial where the disconnect between the “subprime crisis” and the solvency of the cities involved was huge. Well, the connection was finally made when the Auction Rate Security markets went off the scale recently. With failed auctions resulting in some communities seeing back breaking 18 to 20% yields, the idea of issuing new paper or starting new projects will fade quickly. And that reduces employment opportunities in those cities. As well as impacting the investors, be they pension plans or just a bankster in the Caymans, to shun this market and fly for safety in tangible assets. That is why the stories about declining home sales, falling building permit applications and small to medium sized business bankruptcies are starting to scare the dickens out of the investors domestically and overseas. What happens if the monolines have to start paying out on defaulting municipal bonds? What happens if the “good bank” becomes as insolvent as the bad one, reducing the capitalization of the “bad bank” with it’s devalued shares? And what happens when the Municide kills the insurers causing a massive write down of actually worthless assets by the largest banks in the United States? These questions are ones that they do not want to have answers to, but the Federal Reserve has to be aware of this pending implosion.

Unfortunately for all of us, the failure to project future revenues and growth does impact everyone in the U.S. The decline in sales tax receipts, property tax receipts, and other fees originally projected from an expanding economic base as well as healthy real estate market, will eventually lead us to city after city, county after county, defaulting on various securities once thought or perceived to be the safest in the nation. As the resets continue this year and next, even more over-valued real estate which will force property tax revaluations and appraisals to be evaluated lower and lower, feeding the vicious cycle downward even more so. Asset devaluations with accelerating commodity inflation will eventually destroy the average American citizen’s standard of living. Add in the starting wave of HELOC and second or third home equity defaults and you have a formula for a banking crisis on top of the municipal bond crisis to come. The result of this economic contraction along with the forced decline in government spending on the state and local level will leave huge revenue gaps that will result in either default or increased federal intervention.


Yes, this will end with another government bail out. It has to our we will see unemployment top the 20% mark in very short order (their headline number, not reality).


Thu, 10/29/2009 - 02:06 | Link to Comment Anonymous
Wed, 10/28/2009 - 20:55 | Link to Comment Anonymous
Thu, 10/29/2009 - 11:31 | Link to Comment Anonymous
Thu, 10/29/2009 - 09:23 | Link to Comment jswede
jswede's picture

brutal reading...  just brutal.  I was thinking about the parallels to the auto unions throughout reading this, and, sure enough, Lowenstein's "While America Aged" is referenced in the last section.  and we know how that one ends....

Wed, 12/16/2009 - 16:26 | Link to Comment Anonymous
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