Global Economic
Trend Analysis

Recent Posts

Friday, February 29, 2008 10:36 PM

Free Fall In Munis, Worst Month Since 2003

Mish Moved to MishTalk.Com Click to Visit.

Bloomberg is reporting Munis Have Worst Month Since 2003.

U.S. municipal bonds are headed for their worst month in more than four years after collapsing demand for securities with rates set at periodic auctions sent debt costs for state taxpayers and hospitals as high as 20 percent.

The $330 billion auction-rate market froze after dealers stopped purchasing the bonds when buyers failed to bid. Their lack of support has spread to the broader tax-exempt market, sending yields soaring. Borrowers from California to New York City plan to convert the securities to longer-term debt, raising concern that a flood of bonds will overwhelm already sparse demand from banks and hedge funds.

"We're going to get smashed with new-issue volume from all these auction-rate bonds" that are being converted, said Brian Battle, a trader and vice president at Performance Trust Capital Partners in Chicago.

"Every alternative we turn to is worse than it was a year ago," said Roger Anderson, executive director of the New Jersey Educational Facilities Financing Authority, which sells bonds for colleges in the state.
Professor Bennet Sedacca on Minyanville had this to say about Munis today.
My firm has avoided municipal bonds for years now. The above Bloomberg article, an excellent piece by Jeremy Cooke shows why.

This is not a back slapping exercise, it is an exercise in just how bad a 'credit unwind' can get. I expect that many municipal bond portfolios will now get marked down in a big way. Net asset values of all sorts of municipal mutual funds, both closed end and open end will likely get smashed. How badly? It depends on the quality but I am guessing anywhere from 5-20%.

All sorts of 'bid lists' are hitting Wall Street, but not much as trading as folks are appalled at the bids compared their values on their statements. But I will say this. My firm has been waiting on this and I am now getting interested in the municipal market as an opportunistic trade. I am not quite sure at what level as markets tend to overshoot on the upside and downside, so we will now monitor this market for signs of extreme fear and pessimism to enter the market for my firm's investors and our fund.
Here is followup commentary from Sedacca a bit later in the day.

Muni Market in Disarray

As a follow up to the couple of pieces I wrote on munis, the Shoe has officially dropped... like an anvil.

Sources are telling me that the municipal bond market has all but seized up. Bid list after bid list surface, but nothing trades. The reality is that the bids are 10-15 points under statement values.

I have also heard of a few muni arb funds liquidating and shutting down (these funds mainly buy munis and short govies when the spread is wide). Well, it will get wider, and wider, and wider, until the margin clerk arrives.

If I owned a muni fund, I would not trust the nav, particularly in closed end levered funds. Be careful, folks. And don't panic...
With that, let's take a look at a list of closed end muni funds compiled by professor Kevin Depew. Click on any chart to see a sharper image.

Blackrock Long Term Municipal Advantage Trust

Blackrock Long Term Muni Yield Quality Fund II

Blackrock Strategic Muni

Eaton Vance Insured Municipal Bond Fund

Nuveen Prem Muni Fund

A forced unwind in leverage is now underway, with fingers pointed in the wrong direction (see Hedge Funds Blame Wall Street Instead Of Themselves). Anyone over-leveraged in anything right now should be scared half to death.

Mike "Mish" Shedlock
Click Here
To Scroll Thru My Recent Post List

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats