Muni Market Prepares For "Hundreds And Hundreds" Of Downgrades Tomorrow

Tyler Durden's picture

While the impact on Treasurys as a result of the downgrade may be limited (after all the other side of the Atlantic is about as ugly as the US, so where could $8 trillion in marketable USTs practically go... at least for now), the same may not be said about the far smaller, $2.9 trillion municipal market, which is about to see a blanket downgrade tomorrow as S&P warned on Friday night, and of which Matt Fabian of Municipal Market Advisors earlier said that "There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence." The scary bit: "Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about." Indeed, with futures already trading, and most risk assets experiencing a brief knee jerk reaction on a global coordinated PPT response by the G-7, there is still little clear understanding of what will really happen to not only the traditional system but to shadow liabilities such as repos and money markets. And munis are just one part of all of this. So what will happen if tomorrow the muni market starts unravellling, as Whitney, among so many others, has predicted? For that we turn to JP Morgan's Peter DeGroot for some quick observations.

From JP Morgan on munis:

  • Market volatility should continue next week with S&P’s US downgrade following this week’s manic capital market performance
  • Tax-exempt yield movements will likely remain unstable, as dictated by benchmark Treasury yields, despite low long-term new issue volume next week
  • Instability in the US credit may further net outflows in the municipal space. Net issuance, however, remains supportive of liquidity
  • After S&P’s announcement of the US downgrade, expect follow-through on municipals directly supported by the US credit, as well as those highly reliant on the federal government
  • The Central Falls bankruptcy case will be important to follow because of its potential broad implications for local government credit
  • While we have been warning for some time of the elevated strain on local government fiscal positions, Central Falls could potentially have ramifications that could support local credit quality by (i) bringing clarity to the priority of the GO credit, (ii) providing a model for state activism, and (iii) adding steam to the  momentum of some small cities using Chapter 9 to reduce fixed labor costs

What follows for munis as a result of the US rating action:

We anticipate some period of volatile/higher Treasury yields over the short horizon. We do not expect materially higher US borrowing costs as a result of the downgrade given that we do not expect sizable forced selling of Treasury bonds; rate movement of other sovereigns has been muted when faced with similar ratings actions; Treasuries quickly retraced their yield movements following the initial warning by the rating agencies; and the spot metrics for the US are arguably within the range for a AAA sovereign rating (see Treasuries).


We can expect S&P will downgrade all municipals backed by the US credit such as pre-refunded bonds and agency-backed municipal debt. Further, those credits with large fiscal transfer dependencies would also likely see in-kind downgrades. The rating implications are likely similar to those specified by Moody’s in their 7/13/2011 note.


Moody’s suggested moving approximately 7,000 muni bond ratings totaling $130bn, “directly linked” credits in lock-step with the US credit. Moody’s also reviewed “indirectly related” credits and placed five of the fifteen states they rate as Aaa on review for potential downgrade. These would also move in lock-step with the federal government rating.


Issuance limps along in August


The tax-exempt bond market will again take cues from the broader US fixed income markets, based on news of the US downgrade. Yield movements will likely remain unstable, despite low long-term new issue volume. Next week we expect supply of just $3bn based on late adds to the calendar.


Issuance in this range would be the lowest in four months (excluding the holidayshorted week of 7/5/11; Exhibit 3). This follows $4.9bn in primary market supply this week. The largest deal currently on next week’s docket is a $300mn Los Angeles Department of Water remarketing followed by $268mn Florida State Board of Education bonds. The expected light calendar should tick higher as refundings rush to take advantage of fight to quality yield levels if they hold after the S&P downgrade news.


The lack of a primary calendar and investor need for yield against the backdrop of low and dropping highgrade yields provide a fertile environment for  paring typically hard to trade structures and credits. Investors may be motivated to lock in gains on these names and structures while demand is robust to preserve total return performance in the event of an unexpected shift in liquidity between now and year-end.


Municipal fund net outflows resurge on global risk-off trade


Broader credit market uncertainty may prolong muni outflows in the near term.


For the period ending 8/3/2011, combined weekly and monthly municipal reporters registered the highest net outflows (-$232mn) since the first week of June. Highyield funds (-$117mn) and long-term funds (-$726mn) also experienced net outflows. Intermediate funds (+$314mn) enjoyed positive flows for the ninth consecutive week.


Municipal funds who report weekly were also negative (-$861mn) for the period ending 8/3/2011. High-yield funds (-$118mn), long-term funds  (-$732mn) and intermediate funds (-$55mn) all experienced net outflows (Exhibit 4).

And a quick primer on Chapter 9 bankruptcy protection from DeGroot as pertains to not only last week's Central Falls bankruptcy filing, but to what me be "hundreds and hundreds" just over the horizon.

And after all that, the conclusion is that there is no conlusion, and only time will tell what will ultimately happen. That said, anyone actually predicting that a historic US downgrade will have no impact, is an idiot.

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trav7777's picture

how is this shit relevant?  The states with bad credit are already known...SP follows the market again

wang's picture
wang (not verified) trav7777 Aug 7, 2011 8:55 PM

you want relevant

this is relevant

a window into the MSM PR machine

windcatcher's picture

What you nickel squeezers fail to recognize is the philosophy behind this great debacle:  One must understand your enemy, fascism is their game and Adolf Hitler is there idol.


I collect quotes because quotes summarize a person’s existence on Earth in a few statements.


Here are a few quotes from the great fascist that I am sure you can relate to.


Humanitarianism is the expression of stupidity and cowardice.


Those who want to live, let them fight, and those who do not want to fight in this world of eternal struggle do not deserve to live.


"The receptivity of the masses is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must harp on these in slogans until the last member of the public understands what you want him to understand by your slogan."


What good fortune for governments that the people do not think."


Great liars are also great magicians.


Hate is more lasting than dislike.


All propaganda has to be popular and has to accommodate itself to the comprehension of the least intelligent of those whom it seeks to reach.


Demoralize the enemy from within by surprise, terror, sabotage, assassination. This is the war of the future.


Any alliance whose purpose is not the intention to wage war is senseless and useless.


All great movements are popular movements. They are the volcanic eruptions of human passions and emotions, stirred into activity by the ruthless Goddess of Distress or by the torch of the spoken word cast into the midst of the people.


Mankind has grown strong in eternal struggles and it will only perish through eternal peace.


Struggle is the father of all things. It is not by the principles of humanity that man lives or is able to preserve himself above the animal world, but solely by means of the most brutal struggle


Strength lies not in defense but in attack


Demoralize the enemy from within by surprise, terror, sabotage, assassination. This is the war of the future.





The great masses of the people will more easily fall victims to a big lie than to a small one.


The great strength of the totalitarian state is that it forces those who fear it to imitate it.


The victor will never be asked if he told the truth.


Through clever and constant application of propaganda, people can be made to see paradise as hell, and also the other way round, to consider the most wretched sort of life as paradise.


The broad masses of a population are more amenable to the appeal of rhetoric than to any other force. Strength lies not in defense but in attack Make the lie big, make it simple, keep saying it, and eventually they will believe it.


If you tell a big enough lie and tell it frequently enough, it will be believed


The art of leadership... consists in consolidating the attention of the people against a single adversary and taking care that nothing will split up that attention.


The victor will never be asked if he told the truth.


As soon as by one's own propaganda even a glimpse of right on the other side is admitted, the cause for doubting one's own right is laid


The day of individual happiness has passed


"The most foolish mistake we could possibly make would be to allow the subject races to possess arms. History shows that all conquerors who have allowed their subject races to carry arms have prepared their own downfall by so doing. Indeed, I would go so far as to say that the supply of arms to the underdogs is a sine qua non for the overthrow of any sovereignty. So let's not have any native militia or native police. German troops alone will bear the sole responsibility for the maintenance of law and order throughout the occupied Russian territories, and a system of military strong-points must be evolved to cover the entire occupied country." --Adolf Hitler, dinner talk on April 11, 1942, quoted in Hitler's Table Talk 1941-44: His Private Conversations, Second Edition (1973), Pg. 425-426.


The very first essential for success is a perpetually constant and regular employment of violence.


I use emotion for the many and reserve reason for the few.


Success is the sole earthly judge of right and wrong.


Sooner will a camel pass through a needle's eye than a great man be "discovered" by an election?


Is always more difficult to fight against faith than against knowledge


I do not see why man should not be just as cruel as nature. Today I stand here as a revolutionary, it is as a revolutionary against the Revolution.


I believe today that my conduct is in accordance with the will of the Almighty Creator.


Universal education is the most corroding and disintegrating poison that liberalism has ever invented for its own destruction.


He alone, who owns the youth, gains the future.


Do these murderous sociopathic statements sound familiar? They should, Hitler is Obama’s, Bush’s, Bankster’s and the new world order’s Idol and their motivation for the future. Sad but true. Now do you understand how anyone could be so mean!







silvertrain's picture

I got a one to follow those , "no one can take advantage of you without your permission"

goldfish1's picture

It was billed as a day of prayer and fasting to halt America's national decline, and about 30,000 answered the call, flooding into Houston's Reliant stadium for a seven-hour marathon which blended Christian revivalism with hard-headed electoral campaigning.

There was plenty of prayer: some of the faithful stood with arms held high in supplication, others danced trancelike in the aisles and still more lay spreadeagled on the floor.

The rally on Saturday marked another step towards the launch of Rick Perry's presidential campaign

CompassionateFascist's picture

And Adolf's little-known Last Words: "I'll be back, and next more Mr. Nice."

windcatcher's picture

Don’t threaten me you piece of shit! I am lock and loaded and at least I will die honorably.


jplotinus's picture

It is a mistake to claim that "might makes right" to put it no more strongly than that.

Cooperation between and among nations and groups within nations is the right approach to thoughtful resolution of world problems.

Michael's picture

Total bond market collapse bitches.

indygo55's picture

You are back. How are you?

rocker's picture

Merideth Witney finally gets redemption. 

It seems that the market only corrects after burning shorts instead of reality. No matter where.

Mr Lennon Hendrix's picture

It's called a changeover.  The movie goes on, and nobody in the audience has any idea.

snowball777's picture
"No one really knows that they've seen it... but they did."
azengrcat's picture

Meredith is WINNING

disabledvet's picture

I hear she's just offered up her services to Playboy to celebrate. The spread is called "The Whitney Estate" and she's even agreed to pen a missive between "shots in the Rolls, shots with the stallion, and shots with a Browning shotgun while various clay pigeons fly about." Sounds exciting--i've ordered a year supply in celebration of the world actually ending.

Quixotic_Not's picture

LOL, that's exactly what I said yesterday:

Funny, I haven't heard anyone mention how the downgrade(s) of 'MeriKa's credit rating will effect Municipal borrowing/credit ratings!

I think that by 2011 Q4 Meredith Whitney shall be more than vindicated, and the eco-terrorists for hire, like Krudman and the Bernank et al., will be seen for the traitors they are...

Continuation of cake for the unwashed masses and trillions for the Ivy League tribe?

Id fight Gandhi's picture

Time for cnbs shit festival of meredith bashing. Who knows if she'll be spot on in her predictions but she takes much more shit for anything so you know it must hit a nerve

narnia's picture

Meredith wasn't bold enough.  This isn't just a muni problem, it's a state problem too.  

4realmoney's picture

We're going to need lots of Silver Eagle monster boxes to get through all of this.

XenoFrog's picture

I wish I could afford one.

Forgiven's picture

You can't afford not to get one.

CompassionateFascist's picture

Buy into the dips, 10 SEs at a time; they add up fast. I love the sound of silver in the morning.

Manthong's picture

Then buy an empty green box from a dealer (about eight bucks or so) and fill it up over time or make your own version of a green monster box..

you can easily fit 25 rolls of ASE's in a 50 cal. ammo can. 

km4's picture

meredith whitney on muni crisis proved right

oogs66's picture

lots of people called it better than her, but who is to complain so long as they go down!

wang's picture
wang (not verified) oogs66 Aug 7, 2011 8:47 PM

such as?

Quixotic_Not's picture


1000% for sure Bob Chapman did...

FWIW, I called all this shit 10+ years ago, but I don't have the time nor inclination to go looking and link it.

P.S.  Bought PMs 2001-2002, still haven't sold em' ;-)

TruthInSunshine's picture
Italy, Portugal, Spain, Ireland, Greece, the U.K., France...

....Montgomery County, Alabama, Jefferson County, Alabama, hundreds or thousands of other munis...

...Everyone's in debt up to their eyeballs.

What crisis will be next? Nothing like 1800 crises happening at once to get the QE3 pump primed.

*Don't Panic!*- Scene from Airplane‏ - YouTube
Re-Discovery's picture


I guess tonight proves you really can surf a tsunami . . . if your'e a PM investor.

caerus's picture

meredith whitney bitchez!!!

PaperBugsBurn's picture



Burn it all down!


Get the fascists!!  BEHEAD THEM!!!  LMFAO

Ima anal sphincter's picture

Don't laugh.....It's not a joke.

caerus's picture

is it cool if i laugh at your handle?

Dr Hackenbush's picture

the entrapenuer spirit in me keeps saying - "start your own rating agency."  

Lmo Mutton's picture

Get that downgrade on like donkey kong.

Ident 7777 economy's picture



Heng Sen 40 down 2.76% ATTM ...




money flows to t's....

automato's picture

This is a horrible movie! You know the line from the "American President" when Robin McCall: I think the important thing is not to make it look like we're panicking. 

President Andrew Shepherd: See, and I think the important thing is actually not to BE panicking. Well every time some government bozo or economics clown or wildman from omaha opens their stupid mouth they ALL look like they are panicking. I just wish they would all SHUT THE FUCK UP!

Yen Cross's picture

  Is it just ME?  CABLE and E/U inverted H/S on  the H-4? Necklines and all>

Blagio's picture

Meredith Whitney woke me out of bed to show me this article.

cpgone's picture

Meredith Whitney ....WINNING

wang's picture
wang (not verified) Aug 7, 2011 8:53 PM

Meredith on 60 minutes

actually she never said hundreds of billions within 12 months ie 2011

she said hundreds of billions

and in a different part of the interview said that people would start to worry within 12 months ie 2011

here's the interview from xmas 2010 she is on at the beginning and again starting at the 12:44 mark

Yen Cross's picture

60 fallacies?  repeat that lost ( L )

vast-dom's picture

Repeat after me: TBT.



Yen Cross's picture

You have balls!  Mightie small they are. Lets trade1?