A Muni CDS Market Primer

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Thu, 01/20/2011 - 11:42 | 889996 Miramanee
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Here is a video primer on CDS in general:


Thu, 01/20/2011 - 11:49 | 889998 hedgeless_horseman
hedgeless_horseman's picture

Tax exempt muni bonds are usually quoted as a spread over the MMD curve, which is the AAA muni curve. For the purposes of comparison to a CDS, however, we need to first gross up the yield to a taxable bond equivalent yield level i.e. tax-exempt bond yield divided by 65% (or 1-tax rate).

For a primer, the above should be in bold.

Also, doesn't Moody's still have Star City at Aa?



Thu, 01/20/2011 - 11:44 | 889999 oh_bama
oh_bama's picture

hehe... maybe another bailout in the cooking.. so again BTFD!!

Thu, 01/20/2011 - 12:15 | 890080 SheepDog-One
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I wouldnt count on the FED bailing out Muni bonds at all. Sure theyll 'bail out' some companies and banks, those theyll end up owning. What do the central banksters care about owning some old retired pensioners for? For the states and cities, its sink or swim, the FED doesnt care.

Thu, 01/20/2011 - 11:45 | 890005 snowball777
snowball777's picture

Tax-free ain't what it used to be. And that index is weighted in truly bizarre fashion...a grab bag of almost random issuance.

Thu, 01/20/2011 - 13:06 | 890264 jm
jm's picture

Muni bonds have been considered pretty risk free, so there really was no incentive to create subindices like you see in corporate names.  Munis do have their own senior-sub type characteristics, based on revenue stream.    

Converting existing CDS into fixed coupon with upfront will have headaches.

Protect the name, sell the index?

Thu, 01/20/2011 - 13:26 | 890342 snowball777
snowball777's picture

Presuming you can find the darling among the deadbeats.

Thu, 01/20/2011 - 13:30 | 890355 jm
jm's picture

Ummm.... well... <cough, cough>...

Thu, 01/20/2011 - 11:55 | 890011 plocequ1
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Whatever.. Just put up the POMO chart. I need a CUSIP #

Thu, 01/20/2011 - 11:51 | 890016 Spitzer
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It should be quite obvious to all that if Banana Ben will bail out Harley Davidson, Bank of Montreal and buy car loans that he will backstop this whole muni market.

Bernanke is dead set on spending all the purchasing power that already exists.

Thu, 01/20/2011 - 12:12 | 890077 SheepDog-One
SheepDog-One's picture

I still dont see it...bailing out some equities and banks was in Bens interest because in the end, they own and control it. Market takeover. I see no benefit at all to the central banksters to 'bail out' local municipalities so 70 year old pensioners can get a check. How in any way does this do the central banksters any good at all?

Thu, 01/20/2011 - 11:56 | 890029 tecno242
tecno242's picture

It's cracking me up watching the cabal send out the troops on CNBC calling Meredith Whitney unprofessional, a fear monger, unethical.. etc.  LOL

They need mom and pop to stay in their muni's so they can dump all theirs on them.

I love it when those fuckers are left holding the bag.

Thu, 01/20/2011 - 12:07 | 890051 hedgeless_horseman
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Meredith Whitney is the next Marilyn Chambers?

Immediately prior to the movie's release she was the "ivory soap girl", having modeled for the Ivory Snow soap and detergent packaging holding a baby. The brand was sold under the slogan, "99 and 44/100's % pure." 

After the release of the movie, the advertising industry was scandalized, and Procter & Gamble recalled all Ivory Snow products and advertising materials featuring her, unintentionally adding to the movie's hype.



Thu, 01/20/2011 - 12:25 | 890106 SheepDog-One
SheepDog-One's picture

Man I really love it too seeing these smug jerk Wall St cheerleaders lose their damn grins and are suddenly quite worried when theyre holding a bag of toilet tissue.

Thu, 01/20/2011 - 11:59 | 890040 cocoablini
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I'd like to point out that getting 5-20 cents on the dollar for a muni bond in Vallejo is a deflationary occurence- massive deflation of 90% of value and 90% of that money goes to money heaven. As an asset with collateral, its being gone means money supply and leverage is gone.
If this happens more, deflationary forces will be huge and QE3 trillion is guaranteed. As people run to cash and their margins get called, the dollar may get a run on it and gold will be sold off to about 1300- 1290.
It may be time to ride a sell off wave down with the banks in a panic over muni bond losses.
Notice, even today, FAZ is still going lower. Total BS etf.
Is this the "grey swan" we have been waiting for?

Thu, 01/20/2011 - 12:03 | 890048 goldmiddelfinger
goldmiddelfinger's picture

It's also marks a return visit of Mr Max Pain and his mother-in-law Maxine to the Insurance Carriers. Buckle up on the annunity providers too 'cause we ain't finished with the punishment

Thu, 01/20/2011 - 12:10 | 890066 Bastiat
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What muni bond holder in Vallejo is getting 5 - 20 cents?   The 5 - 20 cents is for UNSECURED creditors.

Thu, 01/20/2011 - 12:16 | 890084 SheepDog-One
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But what are the 'secured' creditors really secured by?

Thu, 01/20/2011 - 14:35 | 890550 Bastiat
Bastiat's picture

That depends.  Utility bond holders are secured by revenues of the utility system for instance--they've been getting full debt service.   Typically a revenue bond has a coverage requirement: like 125% (in some cases 200%) of the maximum annual debt service in pledged revenues.  That test is based on current revenues, not projected revenues, btw -- so current revenues divided by max future debt service.   The bonds will require that service rates be raised in order maintain at least 100% debt service coverage.

In addition there is a debt service reserve, typically 10% of the face value of the outstanding bonds. 

Thu, 01/20/2011 - 13:29 | 890351 shortus cynicus
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I don't understand, how defaulting on debt should trigger deflation. Here is my longer question on forum:



Thu, 01/20/2011 - 14:06 | 890465 Spitzer
Spitzer's picture

So why doesn't the Euro rally when there is debt distruction and money "going to heaven" there ?

It is comparable to the dollar.

Thu, 01/20/2011 - 12:00 | 890043 Xibalba
Xibalba's picture

100cents on the $

Thu, 01/20/2011 - 12:02 | 890046 Cleanclog
Cleanclog's picture

Was at an economic forecasting event last night and all the featured economists were giggling and putting down Meredith Whitney's call on munis, saying there would not be big problems and that revenues for munis would be improving though higher interest rates might be required for non G.O. bonds.

I asked if they didn't think some city and county munis wouldn't strategically default by claiming bankruptcy in order to rework or even void some of the out of control pensions and not one of the 5 economists appeared to ever have heard of such a thing.  Blew me away.

Thu, 01/20/2011 - 12:19 | 890090 SheepDog-One
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I dont think the economists will be giggling for long as local municipalities are utterly bankrupt. Theyre shutting down ploice and fire departments...do you know here theyre telling you the police will no longer respond to accidents, burglaries, vandalism, etc? HOW do these giggling economists think the bankrupt cities and states will shortly be OK? Theyre insane!

Thu, 01/20/2011 - 13:07 | 890271 shortus cynicus
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No, they are very sane. They are a part of a scam.

Thu, 01/20/2011 - 12:05 | 890052 youngman
youngman's picture

Look at MUB....down quite a bit the last 4 months..

Thu, 01/20/2011 - 13:45 | 890396 buzzsaw99
buzzsaw99's picture

MUB is down less than my treasury bond fund. Compare MUB to VUSTX before you start freaking out about it. Wall Street wants you to sell your bonds on fear.

Thu, 01/20/2011 - 12:16 | 890083 rlouis
rlouis's picture

"Increasing confusion".... (?) lol... makes me just shake my head to contemplate the Rube Goldberg Municipal Contraption, the contortions and abstractions that had to be made to support debt that never should have been taken on by politicians influenced by bankers and unions. Vallejo x 2.5qd100 = squid bait

Who dares to hit the reset button.

Thu, 01/20/2011 - 12:22 | 890101 SheepDog-One
SheepDog-One's picture

BTW, wheres Harry today with his guarantee that S&P 1284 was as impenetrable and springy as a new trampoline? Like all troll bulls lately, theyre very quiet when their 'BTFD' is suddenly not working.

Thu, 01/20/2011 - 13:57 | 890440 John Law Lives
John Law Lives's picture

BTFD worked pretty well since March of 2009.  In case you hadn't noticed, the Dow Jones rallied over 5,000 points since then.  I hope you didn't keep your head buried in the sand with the rest of the doom-and-gloomers and miss the rally.  It was easy money.

Thu, 01/20/2011 - 14:09 | 890475 Spitzer
Spitzer's picture

Inflationist doomers like Marc Faber have NEVER been bearish on equities. Peter Schiff has never been bearish on equities

Thu, 01/20/2011 - 12:29 | 890123 Ancona
Ancona's picture

I say it's time for everyone to hit the reset button and return to sane purchasing practices which include spending no more than your current revenue stream.

That alone would probably implode the entire financial system. Think of hte tangled mess of interwoven agreements and swaps on top of swaps that will have to be dug through.

Thu, 01/20/2011 - 12:50 | 890198 SheepDog-One
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Sure it would implode this financial system based upon debt.

Thu, 01/20/2011 - 12:49 | 890193 bingaling
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The Fed is going to treat this exactly like Lehman . Ignore it , let a huge deflationary event take place and the they will come in and bailout .The dollar would crash today if Ben came out and said he would do this ,but in a crisis event  he can print like there is no tomorrow and the dollar will stay afloat . I expect the EU will be doing a printoff at the same time .

Thu, 01/20/2011 - 13:30 | 890353 Greater Fool
Greater Fool's picture

Thanks for posting this--very handy insight into a corner of the CDS market I'm not as familiar with.

Thu, 01/20/2011 - 13:35 | 890363 Mercury
Mercury's picture

Great post, especially for those of us that don't live and breath munis every day.

Thu, 01/20/2011 - 13:53 | 890426 John Law Lives
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Muni bond neophytes,

Take note of the pie chart in Figure 7 in the article.  According to the data, a whopping 2% of the munis that have defaulted since 2000 are General Obligation bonds.  As I said yesterday, the specific events in Vallejo have nothing to do with the investment worthiness of munis issued in other US States.  The unfortunate circumstances in Vallejo do not have bearing on how GO bonds issued in Texas (for example) will perform.  When evaluating specific GO bonds issued in Texas (for example) for their worthiness, the fiscal condition of Vallejo IS IRRELEVANT!  That was precisely my point then and now.

Each bond must be evaluated on its own merits.  What happened in Vallejo is no more of  a harbinger of a muni crisis across America than your kid's sneeze is a harbinger of a flu pandemic that will rival the Spanish Flu.

Thu, 01/20/2011 - 14:40 | 890567 Bastiat
Bastiat's picture

I agree.  With the failure of the muni bond insurers, the illusion of fungible muni bond credits is gone.  It is all very specific and local now. 

That doesn't mean muni bonds are a good investment. If real rates are negative, putting money in long-term, fixed income bonds of any kind is losing proposition, by definition.   In hyperinflation it is a total wipeout.

Thu, 01/20/2011 - 15:00 | 890617 John Law Lives
John Law Lives's picture

Yes, we do agree.  The worthiness of each bond offering must be evaluated based upon the fiscal condition and circumstances of the state or municipality which issued it.  That was my point from the beginning.  What happened in Vallejo has no bearing on my muni holdings (none of which were issued in California... or Illinois... or New York...).

Thu, 01/20/2011 - 16:57 | 891159 SmittyinLA
SmittyinLA's picture

"States, themselves, may not file for bankruptcy"

Untrue, a more accurate statement of fact would be "states themselves may not file for bankruptcy under federal rules".

The reason there is no rules or law for a federal bankruptcy of  a state is the federal government and Congress lack the authority to dictate terms to the states-they're sovereign entities, in theory state legislatures or in the case of CA where the citizens have a referendum right the state citizens can write their own bankruptcy law and terms-just like foreign states can and do with the only recourse being the debt holding entity boycotting a further extension of credit-which in most states would be a good idea for the voters and taxpayers.




Thu, 01/20/2011 - 17:01 | 891181 SmittyinLA
SmittyinLA's picture

"States, themselves, may not file for bankruptcy"

Untrue, a more accurate statement of fact would be "states themselves may not file for bankruptcy under federal rules".

The reason there is no rules or law for a federal bankruptcy of  a state is the federal government and Congress lack the authority to dictate terms to the states-they're sovereign entities, in theory state legislatures or in the case of CA where the citizens have a referendum right the state citizens can write their own bankruptcy law and terms-just like foreign states can and do with the only recourse being the debt holding entity boycotting a further extension of credit-which in most states would be a good idea for the voters and taxpayers.




Fri, 01/21/2011 - 06:33 | 892707 bk1037
bk1037's picture

As far as I'm concerned, these media reports are coming out in anticipation for the expiration of federal support to the states in April as part of the stimulus and rescue. Realzing how deep the major states are in the hole, the options seem to be 4:

1) Default or declare bankruptcy and force creditors to take a major haircut;

2) Continue to borrow to prolong the Ponzi structure and the day of reckoning;

3) Rely on the Fed and begin to monetize the muni market when these bonds roll over; naturally this requires the Ponzi to continue;

4) Raise taxes and attempt to gain fiscal responsibility by matching revenue with expense more closely;

There may be a combination of 2 or more of these ultimately implemented, but I don't really see an attractive solution to any of it. The Dems seem to favor option 2 since the unions continue with the current structure, everything else be damned more or less. The GOP seems to be championing option 1 more, but we all see the limitations to that as well as the screaming and hollering from the bond vigilantes.

The issue of the baby boomer pensions coming into focus is only a down payment on what will happen in a few years with Social Security with the general population. Will they have to monetize that as well?

This is all something that should have been able to forecast, and plays into the general ignorance of the population. Politicians continue to spend over what they take in because it is sexy to do so with the people in general, where austerity is not sexy. Everyone realizes the issue but no one wants to accept their share as to what it will take to bring this under control. As long as the United States remains effectively divided, there will be no real solution and a lot of infighting back and forth between the factions. I'm glad I am not a politician, and I have no idea what drives some of these people to run for office.




Fri, 01/21/2011 - 07:40 | 892741 Horatio Beanblower
Horatio Beanblower's picture

Does anyone have a link to a site that shows how much each state and/or municipality actually owes?  Thanks.

Do NOT follow this link or you will be banned from the site!