Muni Market Freeze Screams Danger Ahead

Simon Willms | Stone | Getty Images

Investors in municipal-bonds should be very worried when the Wall Street Journal is running the headline “A Deep Freeze Hits The Muni Market.”

The facts are grim. Muni-bond issuance is on pace for its lowest quarter in at least 11 years.

The last time a similar credit market froze so suddenly and dramatically was when the market for subprime-backed mortgage bonds came to a screeching halt in the summer of 2007.

“Issuance in home-equity asset backed securities, mostly made up mostly of subprime bonds, was $199 billion through July 20, down about 37 percent from the same period in 2006, JPMorgan data showed,” Reuters reported in an article titled…wait for it… “Subprime mortgage bond market in deep freeze.”

Even as the market for subprime froze, some of the brightest minds in the fixed-income universe were talking about buying opportunities.

There was talk of “smart money” going into distressed mortgages. Pimco was starting a new mortgage fund. The baby was getting thrown out with the bathwater, people muttered.

Tim Geithner, then running the New York Fed, made reassuring noises that subprime woes were unlikely to spread out into broader credit markets. The IMF said pretty much the same thing.

All the bright grey things are saying the same about the recent freeze in muni bonds: It’s just a panic. Issuers are waiting for fear to subside—which will happen any day now. If you choose the right munis, you’ll be just fine. Munis don’t really default. Even if we get some defaults, recovery rates will be high and they won’t cause any systemic woes. This is a buying opportunity.

It all sounds awfully familiar.

Look, I know. It’s very possible that the differences between the muni market and the mortgage market are extreme enough that I’m reading too much into the market freeze. Maybe things really are different this time. Maybe the market just froze because we’ve had so much snow this winter.

I'm not a forecaster. I don't pretend to know what will happen to asset prices in the future. But I'm pretty good at spotting warning signs, detecting even whispers of financial fragility. And winds howling through the frozen chasm of the muni market are screaming “danger ahead.”


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