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PIMCO Shares Its Thoughts On The BAB Dilemma; Discloses How It Is "Protecting" Itself From A Worst Case Scenario
Just released observations by Pimco's John Cummings and Bob Fields on recent developments in the municipal bond market.
- The initial catalyst for the selloff in the tax-exempt muni market
was the sharp selloff in the U.S. Treasury market. Also, a significant
increase in supply weighed heavily upon the muni market. - It now appears that the BABs program could be in jeopardy, as a
provision to extend the program has not been included in the current
Senate tax bill. - The supply of tax-exempt municipals remains robust at a time when
many investors do not have the cash flow to add to their muni holdings.
Q: What caused the recent upheaval in the municipal bond market over the past couple of weeks?
Cummings:
The initial catalyst for the selloff in the tax-exempt muni market was
the sharp selloff in the U.S. Treasury market. The tax-exempt muni curve
steepened in tandem with U.S. Treasuries after the Fed released details
of the Quantitative Easing (“QE2”) buyback.
In addition to U.S. Treasury rates moving higher, there were a number
of factors specific to the muni market that led to the turmoil. New
issue municipal bond supply reached $17 billion during the week of
November 15. Although not a record weekly supply, this significant
increase in supply weighed heavily upon the market. Additionally, Wall
Street broker/dealers have committed less capital to their municipal
trading desks than in years past, as we approach year end.
Municipal mutual fund outflows reached $3.1 billion over the week of
November 15, the largest outflow on record, according to Lipper. Most of
the muni fund outflows were from long duration and high yield muni
funds, resulting in significant selling from many of these funds.
Q: Was this a credit-related issue?
Cummings: We
do not view the recent selloff as a credit event, despite a consistent
flow of negative articles in the mainstream press and blogs regarding
challenges facing state and local finances. The press tends to paint the
muni market with a broad brush and does not differentiate among
different types of credit and issuers. When we manage portfolios we
carefully select bonds after a thorough credit research process and
believe there are many healthy credits from which to choose.
Q: How much of the muni market turmoil is due to uncertainty surrounding the Build America Bonds (BABs) program?
Fields:
It now appears that the BABs program could be in jeopardy, as a
provision to extend the program has not been included in the current
Senate tax bill. As a result, the muni market is contemplating an
increase in supply of tax-exempt municipals in 2011. This realization
has weighed heavily on trading desks as they cautiously lower their risk
tolerance for the asset class.
If the BABs program were to be extended, the rebate to issuers would
most likely drop from the present 35% to 32%. As a result, many
municipalities have been working feverishly to get their borrowing into
the market before year end to lock in the higher rebate.
Q: What is PIMCO doing to protect its muni portfolios?
Cummings:
We rely on our tested risk management techniques, combining thorough,
bottom-up, independent credit analysis of individual muni securities
with PIMCO’s top-down macroeconomic outlook. We have customized our
analytics for muni market specific factors, such as taxes, option
valuation and volatility. We construct well-diversified municipal bond
portfolios that attempt to generate the highest return for a given level
of risk. We examine credit quality, call structure, legal structure and
also factor in liquidity conditions when constructing client
portfolios. An example of this is our preference for essential service
revenue bonds, e.g., water and sewer, transportation and public
utilities. We also prefer certain major airports and public
universities. We remain cautious of general obligation bonds as the
slowdown in the economy has decreased income, sales and real estate
taxes, which general obligations bonds are dependent upon.
Q: What opportunities do you see in munis going forward?
Fields:
With 30-year yields now above 5%, we've begun to see retail purchasing
of longer-term munis. Additionally, the redemptions have begun to
subside.
We expect continued large issuance of BABs through year end. Pension
plans, endowments and non-U.S. investors in particular may look to add
good-quality BABs to portfolios across the globe, as BABs remain an
attractive substitute for similarly rated corporate bonds at higher
yields and lower default rates. Municipal credits are an attractive
diversifier for many of PIMCO's clients.
These same opportunities exist for our U.S. taxpaying clients. The
supply of tax-exempt municipals remains robust at a time when many
investors do not have the cash flow to add to their muni holdings. With a
focus on stable, high credit quality issuers, at yields that are very
attractive for a high tax bracket investor, we believe this turmoil may
offer our clients an opportunity for attractive value.
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Dude sounds worried, frightened even.
Nope. Pimco feels untouchable, god-like. Trust me.
The Cummeister is making Bill Gross need a pot of coffee and cigerette, stat.
but he is 100% certain...
PimpCo´s Cummings is, uh, what?
Hey, so a few weeks back Max Keiser announced that his "Siver Bomb" was December 11th. Now I have not heard anything from him since, which is NOT how to do a "Bomb", but I will pick some up tomorrow. You in Peru, they have a lot down there...is it cheaper there? Anyway, DoChen and all PM heads......
Buy Silver!
Alas, silver is not cheaper here.
That´s why I need JonNadler and his JPM minions to bash the price down so I can get some more cheaper when I get back to the USA.
Let's go trolls, you heard the man, time to debunk the gold bugz!
Canned paper in the backyard, wizards!
AM not even getting my weekly check from Jamie anymore, Robot is apparently the only one they have not cut payments to yet, that's why he's still here, albeit demoralized as you can see from his very weak posts. Rumor has it that even Jamie is buying silver eagles at this point and that he's trying to have them shipped to his new home in Tierra Del Fuego. He's trying to buy a piece of the PAtgonia to set up a new republic down there, where he will be el presidente and Blythe will be secretaria del tesoro. I of course will be propaganda minister.
What was that? shred everything, EVERYTHING? All my pay stubs from HSBC too? Blythe has benn vaporized? Yes mein Fueher!!!
Cummings runs the long portfolios whilst his twin sister Goings, handles shorts.
in other news: "The Filibuster Is In Its 4th Hour "
Read more: http://www.businessinsider.com/#ixzz17k1JhpzT"
The Empress'es tune, explaining what the filibuster is just won't go away from my head :)
"Ability of minority, even minority of one ..."
Just a big show to get out of the Friday 'trading session' so-called, then over the weekend all of the pork and beans will have been passed and the US taxpayer will be holding another huge bag.
Bill Gross has already admitted in his commentaries that bonds are not the place to be, but that he still plans to be the best return of a bad asset class. I think it was the same article where he talked about the ponzi quality of government finance. He is a fairly honest man to retail investors. I have avidly read everything he has written. It is well written and very informative. Useful data in the appropriate context. They are trying to promote El Arian. I never knew Bill Gross, but El Arian, you are no Bill Gross.
They are considered side by side equals at Pimco by their parent company that bought them a few years back.
They. are. screwed.
Ponzi scheme.
Pimco. POMO
I hope PimpCo suddenly implodes.
Funny how all this news on China raising rates, trouble over taxes, BAB's cut off, deficits skying, has no effect on anything at all....gee almost like the whole thing is nothing but a pure fraud.
+ 1 SheepDog
NONE of our fundamental problems have been solved. NO ONE of significance has gone to jail.
It´s getting crazier every day.
I dont know what everyone else is doing. Frankly I think these 'bulls' here are just wankers and dont have a dime invested in anything except drool bibs. But bottom line Im not putting a dime within reach of these maniacs, proven the market is nothing but a fraud ran by a pure criminal enterprise and they can pump it daily all they like but only a degenerate gambler would join in.
a look into the future of city life without cops and public services, borrowing is starting to get costly
for the "dream" to continue..
Like in Philly, second highest crime rate city, just announced its cutting half its police force? Ask for level 4 body armor and ammo for Christmas if you live there.
So, you're saying that crime will go down by 50%, right? Cuz' you know, it all starts at the top.
I switched to the House Energy Subcmte. Hearing on Alzheimer's Disease ...couldn't tell the difference from the filibuster !
WHAT THE FUCK?
House Energy Subcommittee on Alzheimer's?!?!
What, in God's name have Energy and Alzheimer's have in common other than a....
Oh fuck.
Never mind.
The world has gone mad.
Sounds like they're gonna put them on treadmills hooked to a generator.
Nonsense, it's perfectly logical. If you were familiar with the U.S.'s energy policy, you'd understand how appropriate it is.
Let me get this straight. It is not a "credit event" but the thought that national government subsidies might be withdrawn sends munis down. And it is 100% certain that no one notices that munis have spent themselves into a hole that they cannot get out of, though they can dig deeper by--get this--selling more bonds!
Unlike the federal gov't, munis don't have a printing press. And there does not seem to be political will in the new congress to bail out thousands of towns, cities, counties, water and sewer districts, etc.
After finding out that either Illinois or New York, were issuing bonds to pay for the interest on their bonds (tickle-bonds), I lost all hope for Govt.
99 pct of Muni investors are asleep at the wheel holding an asset that returns 4pct w/ a potential 30 pt downside if anyone actually took the time to figure out that the municipalities have a massive cash-flow problem and the now Rep congress is not going to make a Federal govt bailout so easy. Imagine needing a 1 trl bailout for the states and the Congress voting NO the first go around.. That is going to make that TARP vote back in 08 look like a picnic.
PIMCO "imploding" would be catastrophic. that would obliterate the last (and by far biggest) retail buyer of government debt and given how the Han Chinese are "going broke on the accelerated plan" the idea that they represent a "backstop" has been untrue for some time now. How tied in PIMCO is to the BAB's is a huge deal and as with almost every major story now being reported vis a vis finance "you're hearing it at ZH most loudly" which is not as it should be as this is clearly a "network needy story." Only now is the results of the Federal Government's response to the 2008 collapse coming into focus--and it's looking beyond any worse case scenario that could possibly be imagined. While an overwhelming inflation trade has been at work in equities all year "out of the blue" as they say a "war trade" has emerged in the form of General Motors. According to CNBC "that IPO was suppose to net 5 billion." They were off by 17 billion. That's a sure sign if there ever was that "geopolitical risk" has been "simply ignored for so long" that "it will now become front and center." And of course right on cue North Korea breaks the Armistice. We are at war on Korea. Period. I would be shocked quite frankly if the North Koreans, Saudis and Iranians haven't been speculating massively in shorting our government debt. Needless to say "they have been quite successful of late" while this Adminstration in connivance with a treasonous media complex has been "breaking the balls of some ex-Ranger types" which fits quite nicely on their views of "those who militantly defend active duty soldiers to their death." Obviously this only strengthens the hand of those who wish to "wipe out the Great Satan." It remains to be seen should this be a treasury bubble bursting "how violent the blowback geopolitically will be." Ms. Clinton has done a spectacular job of "getting that mid-east peace process going immediately." Needless to say "the media tried to blow that process up by having her annointed as VP." I have made scarecly a single bad call year to date and that includes post election stating "all eyes on munis." My "trade" now as they say is to short treasuries and go long muni's. It's time to see "which government the Fed is willing to part with." It amazes me that "we now have explained to the Democrats that you can't have guns and butter, too." They more than anyone should know that as they were personally responsible for the Vietnam War and the death of 60,000 American GI's. Needless to say "the guns and butter didn't work for the Republicans but a few short years ago" but at least one could argue "there existed a strategic interest in it." So by all means "let the media tell you nothing is going on in the marketplace...or anywhere else for that matter."
Republican-Democrat anyalysis? C'mon, man.
LOL. The best straight comedy I've read in quite a while.
We know perfectly well that these pricks have been positioning for AIG status (raised to the Squid power) to kick off the next meltdown "crisis" shake-down.
What a great backstop these freaks have. They remind me of Russian Mafia.
But that would be in the evil USSR. I must be missin' something here, right?
I'm afraid you're quite right. ZH writers are too petit bourgeois, and too ignorant of history and economics, to see that these "crises" are merely planned looting opportunities.
And there's one statistic that shows you this: as I have often pointed out, the one statistic that matters is unemployment in the Bachelor's degree class. That's Table A.4 in the BLS statistics released every month along with unemployment figures.
It was 5.1% in November. And even if you don't trust BLS and double that figure to 10.2% underemployments, it's STILL a signal: "All clear ahead for looting."
So, how do you loot when there's no crisis. Simple: manufacture them. Somehow, it's believed that governments can manufacture "incidents" to justify foreign policy moves, but can't do the same for Mellonesque liquidation moves. But of course it can, and does.
There will be MANY more manufactured crises. Why? Because the powers that be have signed off on $70 trillion in looting, and you may well be right that, in order to rescue MBS, the U.S. will have to manufacturer a crisis which SEEMS to imply a meltdown in MBS. Then the Fed will ride to the "rescue."
Nothing will change until BLS BA+ gets to 20%, at which time the society will have a revolution.
So if you're really dedicated to the proposition that the U.S. is bankrupt, ready to collapse, blah blah blah, then just preface your reply with the month and year BLS BA+ unemployment will hit 20%.
And by the way, Jeb is running. Will announce in August 2011. All sorts of signals here in SF that the old gang (Schultz and company) is revving up for a Bush run. Schultz should be making the "interview journey" in June 2011.
ZH is whut?
Damn, man, maybe u don't reed 2 good.
Seriously, though, I could be dumb as a rock and still I would get that much . . . and I'd have Tyler to thank for it.
How could you be jumping that shark?
Oh, and I know what you're thinking:
What will happen to Jeb's criminal children?
I dunno, maybe they'll have "accidents" like Jackie O's two half brothers. Probably they'll just be put on medication. Ask Barbara.
When are they going to announce that the US Mint is running out of silver? Will the famous unicorn be bringing more; but only if JPM releases its monopoly on fairy dust?
Others problems for the Muni on the way... (thnx to researchrecap.com)
Municipal borrowers rated ‘A’ and below with a significant amount of outstanding variable-rate debt face a growing credit risk from expiring bank facilities in 2011 and 2012, according to Fitch Ratings.
Bank facility expirations for issuers with variable-rate demand obligations (VRDOs) are a growing credit risk, as large levels of bank facilities expire in 2011 and 2012. This is a by product of the auction-rate securities (ARS)/bond insurance meltdown in 2008 and shift to VRDOs. Fitch Ratings is concerned that bank capacity for renewals will be constrained due to bank consolidation, a contraction of facility providers, and uncertainties regarding Basel III capital/liquidity requirements. In addition, Fitch expects that available liquidity support capacity will become increasingly expensive.
If issuers are unable to secure replacement facilities to support their VRDOs or are unable to refinance or convert their VRDOs with instruments not requiring such support, the VRDOs would face a mandatory tender. The draw on the liquidity facility in most cases would then have an accelerated principal repayment schedule (generally three to five years) to the bank.
Also, many issuers have fixed payer swaps linked to the VRDOs that would be costly to terminate. However, given historic low long-term interest rates, absorbing the termination cost and fixing out can be a prudent action for many issuers, which many have done to date.
Fitch has always considered in its analysis the ability of municipal issuers to manage their exposure to variable-rate demand debt. However, with the heightened concern regarding the availability of liquidity providers, Fitch believes lower rated credits are more exposed, as they generally have fewer opportunities for obtaining bank liquidity or could face difficulties in refinancing their VRDOs with fixed-rated obligations and terminating swaps. The inability of an issuer to renew expiring facilities, find alternative sources of liquidity, or effectuate a timely refinancing could yield negative rating pressure.
why would anyone buy munis now when they could buy later and get 7%? Isn't that what Bruce said?
End BAB - before the states become more addicted than they are. They will never begin to curtail spending until the market forces them to do so by charging horrific interest rates. The sooner the spending slow down starts, the better.
I know -- everyone wants painless solutions. Sorry. Spending binge party is winding down.
Just a little empirical info....my property tax bill (based on my home's appraised value) pays for various local muni bonds floated a few years back....when real estate in CA only went up.Surprisingly my property taxes are declining as is the value of the home. Soon BofA will be the one having to pay these property taxes, that in turn pay the muni bond interest.....as there any need to say more?