Only several weeks ago, Ben Bernanke’s comments on tapering the federal bond-buying program sparked shock waves around the capital markets, including the greatest volatility in municipal bonds since 1987, as measured by the Bond Buyer Index.
On Wednesday, July 10th at an address to the National Bureau of Economic Research in Cambridge, MA, he remarked that with unemployment still too high and inflation too low, the Federal Reserve will likely continue some of its easy-money policies “for the foreseeable future.” As the market clings to the chairman’s every word and municipals face increased volatility, how can the individual investor be prepared and keep perspective?
Last week, we were fortunate to discuss the state of municipals with Kurt van Kuller, CFA, managing director and head of public finance in the Credit Division for the Americas at Bank of Tokyo-Mitsubishi. Previously, Kurt spent 16 years at Merrill Lynch as manager of municipal credit research. Jason Voss and Will Ortel of CFA Institute join the conversation.
In addition to speaking about the recent market sell-off and volatility, we talked about the nature and threat of bankruptcy, focusing on specific trouble spots such as Central Falls, RI, and Stockton, CA, and about potential federal proposals to remove municipals’ tax exempt status. Check out the podcast below for more.
Read on for more news on Detroit. To learn more about bondholder rights, visit Jim Grant’s excellent presentation at a CFA Institute conference, where he discusses:
- The ability of the U.S. Federal Reserve and other central banks to manage massive government intervention, maintain faith in their currencies, and prevent the “inevitable” inflation in the long run
- The new bigger, bolder law of unintended consequences
- Bondholder rights in the new era
As well, the situation in Detroit and the challenge to bondholder rights is well encapsulated in this brief excerpt from The Detroit News:
“Emergency Manager Kevyn Orr’s restructuring plan for Detroit is rattling a whole lot more people than city employees and the retirees who stand to lose city-paid health care and chunks of their pensions.
His move to label limited and unlimited general obligation debt as “unsecured,” effectively declaring it no longer backed by the “full faith and credit” of the cash-strapped city, is roiling bondholders and threatening to alter the municipal bond market’s assumption that cities will raise taxes to meet their financial obligations and avoid default.
Not now in Detroit, where taxing authority is already at its statutory limit. Not in a city that already can claim to be the highest taxed municipality in Michigan, notwithstanding a pathetic inability to collect much of the real estate and income taxes it is owed.
Orr’s point: Lenders should have known better, and Detroit won’t pay because it can’t.”
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.