Is the Municipal Bond Crisis Over?

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Is the municipal crisis over? Was there ever really a crisis? Or was it merely a crisis of confidence spurred in part by Meredith Whitney and her now infamous “60 Minutes” appearancein December 2010.

The debate over the ability of states to pay off their debt has been raging in the market for months. Investors have responded by pulling tens of billions of dollars out of municipal bond funds. And all the while, state tax revenues have quietly been climbing.

With six quarters of year over year growth in state tax revenues, it’s gone from a national problem to… “specific states with specific problems”, says Chris Mier, Loop Capital. But “the basic dyamic,” he says, “is that state tax revenue has been growing”. Illinois and California are two states that are still “struggling” but, overall the large states are fairly well stabilized. Hawaii he says, is one to watch because of an unexpected drop in Japanese tourism following the earthquake and tsunami in March.

Here’s the key point: if the overall state tax revenue base is stabilizing, will that stabilize the municipal bond market? Is this crisis of confidence over?

“There is some lingering unease but, the market seems to get getting past it,” says Abdullah Karatash, Head of Fixed Income Credit Trading at Natixis. “This (sell-off) was Meredith Whitney trying to get some press. This is not my opinion, this is what the market thinks.”

The institutional investor never really left the municipal bond market says Elizabeth Fell, U.S. Fixed Income Strategist at Barclays Wealth. It was more about a crisis of confidence at the individual level and now, she says, a sense of calm is returning. No major defaults, interest rates have been stable and while there was an oversupply of issuance towards the end of 2010, demand in the first quarter of 2011 has been greater than supply. The “market has been on a diet”, she says. But this idea of leaving an asset class isn’t the right answer, “tax-exempt bonds for high net worth investors still make sense.”

An email request for comment has been sent to Meredith Whitney’s team.


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