the White House are having a love-fest over the debate on what to do
with the Bush Tax cuts that are expiring in 3+ months. Rubbish. This is
going to be a slug-fest. Take Boehner on his word that he was willing to
consider a deal where those over $250k get stiffed while those under
that mark get a break. That still leaves two very big issues to be
resolved. (I) The AMT and (II) BABS (Build America Bond program).
Focus on BABS. This is an ARRA subsidy for municipal borrowers. It
allows them to borrow in the taxable market (at higher rates) but
Treasury reimburses the borrower for 35% on the interest cost. It was
supposed to be ‘revenue neutral’ as the interest gets taxed. The
reality is that most of this has gotten into tax-protected hands and
therefore it is not neutral. BABS has been up for a renewal for months.
The Republicans hate it. Even the WH was willing to water it down. They
wanted to drop the subsidy to 30% and reduce it further over a period of
years. (Classic)
The Republicans are not going to roll over. And the Dems are not in love
with BABs either. It is just another fee generator for Wall Street. So
I think BABs is dead. At a minimum the subsidy will fall significantly
below the 30% proposal by the WH. Either way the window of opportunity
is closing.
Now consider this article from Bloomberg. A description of the latest BABS deal:
Borrower: Ohio State University
Amount: $655 mm
Maturity: 30 years
Coupon*: 5%
*(Deal’s not priced yet-my estimate)
In this deal the FEDs pay OSU $11.5mm a year for a total of $340mm over
the 30 year term. That is a sweet-heart. Everyone wants that. And it is
going away.
The CFO for a big Muni project has these deep thoughts:
“I
need to borrow mega bucks sometime in the next 24 months. Yields are at
dirt levels today. Plus that BABS ‘bonus money’ may be going away. I
would look stupid if I did not try to capitalize on that. Hmmm. I am
going to call Merrill right now and pull a deal off the shelf for a
'half-yard'!”
From the Bloomberg article:
Both
the University of Texas and University of California have Build America
offerings of more than $500 million scheduled in the next two weeks.
The 30-day visible supply of municipal bonds reached $11.97 billion today, the highest since July 23.
If BABs does get gutted (as it should) then the window will close in a
few months. Everyone with a deal that is ‘ready to go’ will try to close
it by year-end. Wall Street will moan with the big flow. That means
they will charge bigger fees and higher spreads and with that incentive
they will push out every deal that they can.
BABs issuance is $131b year to date. That is a “chunky” number. It will
ramp up. It is all long duration paper. That will be small compared to
what Tim Geithner has on offer. Then there are the corporates who can’t
believe how cheap they can raise money. The regular Muni’s and the
dollar-based sovereigns have bonds for sale too. It will add up to big
numbers in the next three months. We might see some old-fashioned supply
and demand stuff impacting bond prices. That would be a hoot.
Note:
Half of Wall Street and most of the TV talking heads are saying the Fed
is going to launch a trillion dollar QE POMO buy any day now. I don’t
see that happening. There is no emergency today. The S&P is at 1120,
the economy is still growing. No need for more emergency measures at
this time. Better to keep that powder dry.
Bernanke reads screens too. He saw what happened in gold and the $
today. Those markets made big gap moves to record levels in part on the
expectation that a big QE is coming. I doubt Ben will gamble a blowup in
gold and the dollar at this time. I don’t think that scenario is priced
into the credit market.
Fast markets to come.
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Chart: SPX
Crosstown traffic overhead.
http://www.screencast.com/t/ZDFjZGZk
The less QE2 sounds logical, the more likely it will be to happen.
Thanks as ever for the post Bruce
It just occurred to me. Has the US Government just become a central planner?
Bruce...thanks for another good read...has anyone seen the yen tonight??
1120 may be good for now. Uncle Ben is buying time. Buying it with your money, but they are buying time none the less. Any bets on a bounce at 1040 again, anyone, anyone?
Good post and very informative.
I disagree with you on Boehner's sincerity though on discontinuing tax cuts on the rich. The man is an A1 Class liar. That and the fact the Republican receives federal health benefits while sucking down cigarettes, going to skin cancer inducing tanning beds to fall asleep for God knows how long does not endear me to the little basturd.
Also I would like to mention to all you basturd Republicans who haven't figured it out yet, the I.R.S. reported that the 400 richest taxpayers paid only 16.6% of their income in federal income taxes in 2007 (the most recent year available). All the while complaining their anus was sore from being raped.
Obama smokes too.
You should thank everyone that smokes. The taxes they pay on cigs now covers the heath effects, and funds a myriad of state and local programs too.
Really?
"the Republican receives federal health benefits while sucking down cigarettes, going to skin cancer inducing tanning bed."
The Fed and the Congress are screwing us all for trillions a year and you think who smokes what is important?
Sheesh.
Richest taxpayers paid 60% of the total tax...and your salary. Focus on the Ruling Class.
Obama only lies when he is reading the speech someone else wrote displayed on his teleprompter.
He can not speak without a teleprompter so that means he only lies.
How can a man write two books without the ability to think for himself?
"Bastard" republicans?? Are you still of the red team -bluee team mentality after all theses years ?? My god. I suggest reading Dr. Seuss - the one with the two sides, some have stars on their bellies and some do not. Both sides are manipulated by the "engineer".
we all have our biases. But to come here not
recognizing there is just one party ignores
the last couple of years completely
"Two cheeks, same ass."
Any artists out there that could draw a red white and blue donkey/elephant sharing the same rear end? Feeling the need to decorate my truck for the coming election.
S&P500 1120 is a friggin joke.
How can anyone claim that such is a sign of a growing or even a half-assed prosperous economy?
This ain't 1999, folks.
let us not forget the deeper thought, however. should the subsidy disappear the need to borrow still exists. i understand how having a "federal teaser rate" encourages states and municipalities to borrow and banks to lend despite the downturn. but it does allow these states to "borrow cheaply." should that change, well, needless to say "the borrowing doesn't stop." more importantly, "who does the lending"? with "Wall Street profitable and therefore not bankrupt...but not really lending" certainly the policy is for "balance repair" and "a new era of responsibility" on Wall Street, yes, yes?
Great stuff; totally agree
Nothing coming but sameness on the Beltway for the next 49 days. Incumbent Critters are heading home soon in an attempt to save their jobs. No way they'll touch a money issue. And Ben doesn't want to telegraph more heat before Nov. 2 either. Only a fool would think the Fed has no political antenna.
The tax debate between Obamus and Boner is political theater....each trying to jockey their horse to the finish line. Dems want Boner cornered on the tax issue. He didn't take the bait. Same old midterm bullshit.
The Street rumor of QE2 pre-election is a prop for a market with prosthetic legs. Ignore. Soon the market will telegraph its need for QE, screw the Dems further into the ground and start preparing to work a new crew.
We should all know by now the power turn is the best time for the boyz to work their best shit. Don't underestimate.
Bruce, I read all your columns whatever the subjects, as you make it all clear.
I wonder if there were a way for you to monetize your writing talent...
I'm raking it in:
Bwahahaha killer.
I hope the old folks can survive on top ramen.
Nevertheless bond biz has been good.
Yeah, but you also called the CHF move to 1. Hopefully you made more than 2.25 from that.
Stay in the deep end of the information pool, BK. But if you need mo money, I suggest postings on the best titty and beer hangouts for old guys...... coast to coast. ;>)
Heck, was more than me, until that $JPY bump a few minutes ago....
Thank you Bruce. J6P
BK,
As usual, great stuff...thanks!