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Remember when municipal finance specialists, politicians, fixed-income fund managers, credit analysts, municipal finance columnists, municipal finance executives, bond analysts, business reporters, and sundry other "experts" pooh-poohed the warning
Meredith Whitney's gave in December on CBS's "60 Minutes" about a coming meltdown in
the muni market, with some suggesting the banking analyst was well out of her
depth?
Well, I wonder what they are saying now
that Jeff Gundlach, one of the most successful fixed-income investors of
modern times, has voiced similar concerns about the outlook for what has been
a very popular investment class:
"Jeffrey Gundlach: Munis Are The New Subprime" (CNBC.com)
Bond king Jeff Gundlach likened
municipal bonds to subprime mortgage bonds on CNBC’s Strategy Session
on Wednesday.
“You’ve got a history of
low defaults, which is comforting. But that kind of sounds like what subprime
sounded like back in 2006,” Gundlach said.
Gundlach said the markets for subprime
bonds and municipal bonds are similar because the buyers are similar. Muni
bond buyers aren’t seeking fundamentally good credit stories—they
are buying for “technical reasons,” Gundlach said. This is
exactly what happened with subprime
With subprime bonds, buyers were
seeking highly-rated credit with very low default histories in order to
satisfy regulatory bank capital requirements. They largely ignored
deteriorating fundamentals, and continued to buy subprime mortgage-backed
securities at a rapid clip even when the problems with the market were
becoming apparent in the first half of 2007.
Muni bonds are bought for a different
“technical reason”—the tax benefit—and buyers are
once again ignoring deteriorating fundamentals. So are munis going the way of
subprime?
“If by that you mean, lower, then
yes. If you mean crashing, I’m agnostic on that,” he told David
Faber.
Got that? Munis are headed lower. And
he’s “agnostic” on whether or not they will crash. When one
of the most important names in bond investing says he cannot tell whether or
not an entire class of bonds will crash, there’s reason for investors
to worry.
Michael
J. Panzner
Editor, Financialarmageddon.com
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