Take 15: The Hunt for Yield, the Municipal Bond Market, and Crossover Buyers (Video)
In a December 2010 episode of 60 Minutes, Meredith Whitney made the famously bearish prediction that “between fifty and a hundred counties, cities, and towns in the United States would have ‘significant’ municipal bond defaults starting in 2011, totaling ‘hundreds of billions’ of dollars in losses.” While municipal bond defaults peaked at $8.2B in 2008, historically low yields and general bearish sentiments have kept investors skeptical.
In an interview with Lauren Foster this February, Cate Long, a municipal bonds blogger for Thomson Reuters, discusses Whitney’s prediction in the context of notoriously stressed regions, most notably California, Detroit, and Puerto Rico. She comments on Whitney’s “misinformed understanding of the ability of states to raise taxes or cut expenses” and offers a more optimistic outlook for 2013. Indeed, revenues have returned to pre-2008 levels, and governors are working hard to reestablish rainy day funds, she says.
Still, the municipal market is not out of the woods; Long notes that in the current fiscal environment, neither Congress nor the Federal Reserve is likely to bail out distressed municipalities, ultimately forcing bondholders to take a haircut. Moreover, she points out, the real danger, especially in the case of Detroit, is not in municipals but in their $400M of interest derivatives. In the interview, she also addresses the future of tax-exempt bonds in the face of tax reform and the magnitudes of the haircuts bondholders will likely take.
This episode of the Take 15 Series was originally released on 5 June 2013.
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