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Municipal Bond Maze
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Just about a year ago this week, rumors started to circulate in the sometimes sleepy and boring world of municipal finance. The crisis talk went into overdrive, of course, when Ms. Whitney appeared on 60 Minutes andwarned that the $3 trillion municipal bond market faced the immediate threat of hundreds of billions of dollars in defaults.
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President Obama’s new American Job Act proposes changes to the tax-exempt status of the income from municipal bonds, which is “something we haven’t seen really in memory,” said Ben Thompson, a portfolio manager who oversees $7 billion in tax-exempt bonds for Samson Capital.
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As the U.S. inches closer to a possible default, the already struggling municipal markets are feeling the pain, Bernard Beal, CEO of M.R. Beal & Company, told CNBC Tuesday.
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More proof that Meredith Whitney may be right with her prediction of municipal bond Armageddon: She was right about Goldman Sachs.
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The major issue facing states and municipalities is the unsustainability of their defined benefit public pension plans. States and local governments made promises to public employees that upon retirement they would receive defined payments for the rest of their lives.
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Adding to the overall improved tone to the markets, muni-bonds got a boost of confidence today from S&P as the ratings agency bumped up its outlook for the state of California to “stable” from “negative.”
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New Jersey's move to take out a short-term $2.25 billion loan to pay its bill is symbolic of how difficult state and municipal financing will be in the year ahead, analyst Meredith Whitney said.
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When famed banking analyst Meredith Whitney speaks,the market listens.
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The consensus of the experts in municipal debt is that cities and states will make “the hard choices”—namely budget cuts, reductions in pension and health benefits, and tax cuts—to avoid defaulting on their bond obligations.
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The municipal debt market held steady Monday morning while Treasuries sold off after Standard & Poor’s said there was almost a one-in-three chance that it would downgrade US Treasury debt in the next few years.
MORE COVERAGE
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The municipal bond market will likely see more volatility in 2011, and there may well be municipalities that default in the year ahead.
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Imagine getting a bill for $1 trillion, or $3 trillion, with a due date in the next 30 years. This is a situation faced by all 50 states, whose pension funds are underfunded by $1 to $3 trillion, depending on whose estimates you believe.
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A spike in yields and a desire to diversify portfolios is prompting some unusual investors to jump into the municipal bond market, say traders and analysts.
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Fears of a massive wave of municipal bond defaults have given rise to a new question: how can investors profit if a nightmare meltdown scenario becomes reality?
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States are caught in an extended fiscal squeeze caused by rising costs and lower tax receipts. In addition, the aid distributed by the American Recovery and Reinvestment Act of 2009, is pretty much used up.
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Meredith Whitney, once a media darling , finds herself pilloried in the news media and by colleagues these days for predicting a calamity in municipal bonds. Critics say the call is overstated, but it has alarmed investors in that usually sleepy market. The New York Times reports.
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Financial analyst Meredith Whitney is sticking by her call that the nation's municipalities face a wave of defaults, despite a wave of criticism over her prediction that hundreds of local governments would not meet their obligations.
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People need to think about junk bonds in relation to comparing them to municipal bonds, Jeffrey Gundlach, CEO of the fixed income investment management firm DoubleLine Capital and former CIO of TCW Group, told CNBC on Wednesday.
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America is now officially worried about a municipal bond meltdown. In a piece called ‘Day of Reckoning,’ CBS 60 Minutes showcased financial analyst Meredith Whitney’s bold prediction that we will see “50 to 100 sizable [muni] defaults...more. This will amount to hundreds of billions of dollars of defaults.” It’s a frightening forecast.
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Notable analyst Meredith Whitney created a lot of buzz defending her prediction that the $3 trillion municipal bond market faces the immediate threat of hundreds of billions of dollars in default. "The hundreds of billions of dollars is really the issue," Ben Thompson told CNBC on Wednesday.
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To be clear, I'm not saying the muni market today offers the same opportunity as it did in 2008, during the heart of the credit crisis. But it now presents a fantastic opportunity for those looking to generate tax-free income, and here's why.
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In an interview broadcast on “60 Minutes” Sunday night, Whitney, who runs the Meredith Whitney Advisory Group, argued that the $3 trillion municipal bond market faces the immediate threat of hundreds of billions of dollars in defaults. That notion has put the investment community on the defensive Monday, as bankers and analysts scramble to reassure investors and clients that the market isn’t about to fall to pieces.
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If you go by some recent notable analysts' reports, we are headed for a municipal bond crisis to rival the financials' collapse of 2008. This doomsday prognosis is simply overblown, and here's why.
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Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers, the New York Times reports.
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Although current law does not allow states to go bankrupt, some experts believe it should be permitted so the federal government can avoid bailing out states faced with massive budget shortfalls and the end of stimulus funds in 2011.
Slideshows
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CNBC.com has obtained from Fitch Ratings the lowest-rated American municipal bonds that the agency covers, which are the bonds that carry the highest probability of defaulting on debt payments.
Videos
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Bankruptcy is not an option for US states, Gov. Jack Markell of Delaware told CNBC. "Rather than bankruptcy, I think what states really need is electred officials who are willing to make tough decision," he said.
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Discussing whether Meredith Whitney's predictions on the muni bond market are overblown, with Thomas Doe, Municipal Market Advisors CEO, and Doug Dachille, First Principles Capital Mgmt. CEO.
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Why more voices say trouble is brewing in the muni bond market, with Richard Ciccarone, McDonnell Investments, and Peter Kaufman, Gordian Group.
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Discussing whether it's a good time to get into muni bonds, John Miller, Nuveen CIO & muni bond portfolio manager, and Michael Darda, MKM Partners chief economist.
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Bill Gross, co-CIO of PIMCO, tells CNBC why he thinks muni bond yield returns are attractive.
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