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CNBC
reports that The
Muni Bond Market Signals Danger Ahead.
(emphasis
mine) [my
comment]
The Muni Bond Market Signals Danger
Ahead
JOHN
CARNEY, CNBC, CADIE THOMPSON, NETNET, NET NET, MUNI BONDS, MUNICIPAL BONDS,
GOVERNMENT, BUSINESS NEWS
Posted By: John Carney Senior Editor, CNBC.com
CNBC.com
25 Feb 2011 12:24 PM ET
Municipal bond issuance dropped to an 11-year-low in January. It
has not picked up substantially in February, according to the muni bond
people I speak to.
January saw $12.2 billion of new debt, a decline of nearly 63 percent
from January 2010. Volume hasn't been this low since January of 2000.
…
Some say that issuers are holding for a more borrower-friendly market. Yields on triple
A-rated 10-year munis reached a 24-month high of 3.46
percent in mid-January, according to The Bond Buyer. Many states and
cities seem to think that they can wait out the high-yield environment.
This could be a dangerous game. It has the potential to result in a pent-up
demand for credit. If yields remain elevated for long enough, borrowers
could find themselves forced to come to market when everyone else is also
trying to sell bonds. This surge would likely push down prices and
raise yields even further.
We've heard this kind of talk about "temporary market
dislocations" before—back when the market for
mortgage-backed securities began to fall apart in 2007 and 2008. There was
lots of confident talk back then, about market prices not reflecting
fundamentals and too much risk being priced into mortgage bonds. As it turned
out, market prices were accurately reflecting the climb in mortgage
delinquencies and decline in revenue streams from the bonds.
A far less benign explanation for the decline of issuance could be that the
muni market is freezing up. We've now seen month after month of
outflows from muni funds, forcing funds to sell bonds to pay off
exiting investors. It's very likely that some of the decline of
issuance results from advice from bankers, who fear they cannot sell the
bonds at yields attractive to the borrowers.
The mortgage-backed security market froze up in a similar way prior to
the finance crisis. Take a look at the chart above, which shows the
decline of private label mortgage backed securities that began in mid-2006.
That decline, as it turned out, anticipated a huge jump in mortgage defaults.
…
I don't think that the muni market is transparent enough to allow for accurate
forecasting—which is why I'm not predicting a surge of defaults. But I
do think it makes sense to watch for potential warning signs in the
market—and the dramatic drop in issuance could well be
flashing: DANGER AHEAD.
The
Wall Street Journal reports about Bondholders Left in the Dark.
JANUARY 26, 2011
Bondholders Left in the Dark
Concern Grows Over Lack of Financial Disclosure by State, Local Governments
By IANTHE JEANNE DUGAN
Investors and regulators are growing increasingly concerned about the
quality and timeliness of information that state and local governments are
disclosing about their finances.
…
Amid governments' financial woes, meanwhile, angry investors are
finding themselves blindsided by bad news. Those concerns are
reflected in a forthcoming study that shows that public issuers routinely
file information about their financial health well beyond the date they
promise to bondholders, if at all.
Stephen Voss for The Wall Street Journal
MARYLAND SURPRISE: Helen Kirkpatrick, at home in Chevy Chase, Md., said
she was shocked to get a letter from a broker offering her 50 cents on
the dollar on her Maryland Health and Higher Education bonds. [we are going to see a lot
more of this]
This weak disclosure is raising anxiety in the $2.9 trillion market, where INVESTORS
WITHDREW MORE THAN $20 BILLION FROM MUNICIPAL BOND FUNDS IN RECENT WEEKS.
…
At the request of The Wall Street Journal, DPC DATA Inc., a specialist in
municipal disclosure, did an extensive analysis of disclosure and found the
problem growing since a 2008 study. Of 17,000 bond issues it studied,
more than 56% filed no financial statements in any given year between 2005
and 2009. More than one-third of borrowers entirely skipped three or
more years, and the number grew to 40% in 2009, as credit woes mounted.
Another 30% filed extraordinarily late in 2009.
"This works out to insufficient ongoing disclosure information for more
than $2 trillion of the $3 trillion in outstanding bonds," says Peter
Schmitt, chief executive of DPC of Fort Lee, N.J.
While earlier studies by DPC and others show municipalities' sluggish filing,
the new study suggests that municipalities are getting worse at a time when
investors need information the most.
The rampant lack of current official filings reflects a broader
disclosure problem. Many cities, states, hospitals and other public
borrowers don't make general financial records accessible, investors and
regulators say, and if they do, they are often so confusing or spotty that
even professionals can't make sense of them.
The annual audited statement itself often contains detailed and vetted
information that isn't included in other documents, such as pension
and health-care liabilities, according to Mr. Schmitt.
In contrast, public disclosure for corporate bonds and stocks are consistent
and released far more quickly.
Media reports, of course, are rampant about city and
states' fiscal woes. Many municipalities that don't file timely
financial statements may have public information available to ambitious
investors, such as minutes of public meetings.
But it isn't enough for an issuer's woes to be publicized through
word-of-mouth or a newspaper story, Ms. Greenberg says. The
information has to be filed with the Municipal Securities Rulemaking Board, a
self-regulatory organization that posts the documents on a publicly
accessible website called EMMA.
The SEC is looking for cases in which municipalities failed to warn investors
of fiscal problems. The agency recently brought a case against New Jersey,
claiming that the state failed to give bond investors a full picture of its
large pension obligations.
New Jersey authorities settled the SEC case without admitting or denying
wrongdoing.
Illinois is facing an SEC inquiry on a similar issue, about its
communications concerning measures it has undertaken to reduce pension costs,
according to the state's recently prepared bond documents.
…
INSTANCES OF MUNI-BOND INVESTORS GETTING CAUGHT OFF GUARD BY BAD NEWS
ARE EMERGING AS GOVERNMENTS AND OTHER BORROWERS STRUGGLE IN RECENT MONTHS.
The Clay Gas and Utility District of Clay County, Tenn., didn't file
disclosures for 10 years, until one in November saying it
didn't expect to make future payments.
A spokesman for the utility didn't return a phone call seeking comment.
Helen Kirkpatrick, a retired journalist in Chevy Chase, Md., spent $25,000 10
years ago on Maryland Health and Higher Education bonds. She said she checked
regularly for updates online and didn't see anything amiss. But then in
October, she says, she was stunned to get a letter from a broker
OFFERING 50 CENTS ON THE DOLLAR, saying there was no promise the
issuer would pay more in the future. She searched for information and found
none and couldn't reach the issuer, she says. Confused, she took the deal.
…
Chowchilla, Calif., defaulted on its bonds used to renovate city hall
earlier this month. The city, which bills itself the "Gateway to
Prosperity," had never filed documents notifying investors that a
default was coming.
The city's most-recent financial statement currently on file is for the
fiscal year ending in June 2009.
More recently, there have been several red flags.
The city last year dipped into its reserves to pay bond investors, putting it
in technical default. This means that while it ran out of money from
the normal fund meant to pay bond holders, it still paid. It reported
this issue and indicated it would make the payment.
The city's financial problems worsened and became public in some press
reports. Some investors apparently got cold feet and sold at a loss in
December, according to data on trades at the Municipal Securities Rulemaking
Board.
Still, several experts say, investors had no reason to know that the city in
January would have trouble paying them.
"The reasons for the default that they list in their resolution—expenses
in excess of revenues, late payments from the state, etc.—were
happening in just about every city in California," says Justin Marlowe,
a public finance professor at University of Washington, who studied this bond
disclosure. "But only a few have actually defaulted."
He says that Chowchilla's financial reports were incomplete and didn't alert
investors of its forthcoming default.
The default even surprised Wayne Padilla, assistant city administrator.
He says the trustee stopped paying investors because the reserve fund
was $500 short. "I CAN'T WARN YOU ABOUT SOMETHING I DON'T KNOW IS
HAPPENING," he says.
The city and the trustee later worked out an agreement to pay bondholders, again
out of the reserve, according to a statement by the trustee, which didn't
comment on the original decision to stop paying.
Richard Little, a retired financial advisor in Danville., Calif., with about
60% of his multi-million portfolio in municipal bonds, says he has
taken to driving to municipalities where he holds stakes to see if stores are
full and the roads have traffic.
"Historical data shows you the risk is low," he says. "In
reality, I'M PETRIFIED."
The
International Business Times reports that 'King of Bonds' sees municipal bonds
collapse and plans to buy after carnage.
Thursday, February 24, 2011 8:46 PM GMT
'King of Bonds' sees municipal bonds collapse, plans to buy after carnage
By Hao Li
Jeffrey Gundlach of DoubleLine Capital, dubbed 'King of Bonds' by Barron's, sees a "major
collapse" in the municipal-bond market. After the carnage happens,
he plans to scoop up the bargains left behind.
Bond investors should pay attention to what he says. After all, he's a
leading candidate for the title 'King of Bonds' (the other is PIMCO's Bill
Gross). He earned that title by consistently notching top-tier returns for
many years and for predicting the sub-prime mortgage crisis back in 2006.
Now, he thinks municipal bonds may be the next victim. On the fundamental
side, he sees the weakness of state and local government
finances, something that's more or less obvious to many
analysts.
Gundlach, however, supplements that fundamental view with an astute
observation: the municipal bond market has a "weak psychological
underpinning."
He said many investors in this market are "wealthy individuals who buy
the securities purely because of their tax advantages and HAVE LITTLE
KNOWLEDGE OF THE FUNDAMENTALS OF THE PAPER THEY OWN."
Moreover, they tend to be "all-in" investors who
don't really own other financial assets.
Therefore, as billions of dollars of defaults pour in (the actually amount
doesn't matter, said Gundlach), these investors will panic and sell.
Closed-end municipal bond funds may drop to as low as 40 percent of net
asset value, according to Gundlach. In other words, relative to the
worth of the funds' portfolios, the shares of these funds would trade
at a 60 percent discount.
When that happens, Gundlach plans to use a joint venture he set
up with RiverNorth Capital to buy up these funds.
Gundlach also has a bearish prognostication for the US real estate market: he
expects it to fall by another 10 to 15 percent.
My
reaction: A
municipal bond collapse is underway.
1) Municipal bond issuance dropped to an 11-year-low in January, and it has
not picked up in February.
2) January saw $12.2 billion of new debt, a decline of nearly 63 percent from
January 2010. Volume hasn't been this low since January of 2000.
3) The dramatic drop in issuance is flashing: DANGER AHEAD.
Issuers awaiting a more borrower-friendly market are setting the
stage for disaster
1) Many states and cities seem to think that they can wait out the high-yield
environment.
2) This is creating in a pent-up demand for credit.
3) With inflation picking up, a borrower-friendly market will never arrive,
and borrowers will find themselves forced to come to market when everyone
else is also trying to sell bonds.
4) This surge will likely push down prices and raise yields even further.
Muni Market Is Freezing Up
1) The muni market is freezing up. We've now seen month after month of
outflows from muni funds, forcing funds to sell bonds to pay off exiting
investors.
2) Today's talk about "temporary market dislocations" echoes things
said when the market for mortgage-backed securities began to fall apart in
2007 and 2008.
3) When the mortgage-backed security market froze up in a similar way prior
to the finance crisis, their value never recovered.
A familiar lack of transparency
1) Public issuers routinely file information about their financial health
well beyond the date they promise to bondholders, if at all.
2) A DPC DATA Inc. study found that out of 17,000 bond issues, more than 56%
filed no financial statements in any given year between 2005 and 2009.
3) This lack of transparency also echoes the information vacuum which
surrounded mortgage-backed security before their collapse.
Angry investors finding themselves blindsided by bad news
1) Amid governments' financial woes, angry investors are finding themselves
blindsided by bad news.
2) Below are examples of muni-bond investors getting caught off guard by bad
news in recent months:
A) The Clay Gas and Utility District of Clay County, Tenn., didn't file
disclosures for 10 years, until one in November saying it didn't expect to
make future payments.
B) Chowchilla, Calif., defaulted on its bonds used to renovate city hall
earlier this month. The city, which bills itself the "Gateway to
Prosperity," had never filed documents notifying investors that a
default was coming.
C) Some investors (like Helen Kirkpatrick) are being offered 50 cents on the
dollar for their bonds by their brokers.
D) Etc…
'King of Bonds' sees a "major collapse" in municipal-bond
market
1) Jeffrey Gundlach of DoubleLine Capital, dubbed 'King of Bonds' by
Barron's, sees a "major collapse" in the municipal-bond market.
2) The municipal bond market has a "weak psychological
underpinning":
A) many investors in municipal bonds are "wealthy individuals who buy
the securities purely because of their tax advantages and have little
knowledge of the fundamentals of the paper they own."
B) They tend to be "all-in" investors who don't really own other
financial assets.
C) As billions of dollars of defaults pour in, these investors will
panic and sell.
3) Closed-end municipal bond funds may drop to as low as 40 percent of net
asset value (a 60 percent discount).
Conclusion: Municipal bonds are headed for a blood bath. Of course,
when the muni-carnage gets underway, attention will then shift to the next
shoe to drop: treasuries. Things are set to get very interesting in 2011.
Eric de Carbonnel
Market Skeptics
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