Yesterday was a “risk off” day. The dollar index floated above 79. Stocks and commodities got hammered.
Still, since our mind tends to wander away from the herd, we were struck by another sell-off that began earlier this month, and accelerated big-time on Monday…
That’s just one example among many municipal bond funds that were humbled in a biblical way. They recovered a bit yesterday, but not enough to regain their former hubris.
In fact, Monday was the worst day for municipal bonds since the Panic of ’08, the yield on 10-year AAA debt blowing out from 2.75% to 2.93%.
That prompted several issuers to hold off on new financing plans. For instance…
- Orange County, Calif., postponed the sale of $160 million in Build America Bonds (about which more below). “The bond market has been pretty volatile and flooded with new issues,” says county controller Mike White
- Cleveland’s public hospital system postponed the sale of $100 million in bonds intended to refinance existing higher-interest debt.
“Yields rose in such a way that our refunding didn’t make sense anymore,” says president Mark Moran of MetroHealth System in Cleveland. Heh, if he thinks yields are high now, and it doesn’t “make sense” to enter the credit markets, he’s in for a rude shock.
The Great Recession cratered revenue for states and municipalities all across the nation. Desperate to make ends meet while still maintaining existing levels of services, they did the logical thing: They cried to Washington, DC.
Of course, as we’ve been observing in excruciating detail, Washington came through – big. Unfortunately, that milk and honey was flowing from a dry teat.
Thus, with morose trepidation, we forecast this morning that the municipal bond market is facing a double whammy , on the two following dates:
- Dec. 31, 2010: Funding for Build America Bonds runs out. These bonds were part of the “stimulus” bill passed early 2009, subsidizing municipalities’ costs for public works projects to the tune of $150 billion.
About a quarter of all muni issuance this year has been Build America Bonds. Unless the lame-duck Democrat-controlled Congress moves quickly, this money goes bye-bye in six weeks
- June 30, 2011: Still more federal aid expires on this date – some of it authorized by the “stimulus” bill, more under the “jobs” bill passed last summer, totaling another $150 billion to date. Without this money, states would have already slashed a host of programs, including unemployment benefits and Medicaid.
The likelihood the new Republican-controlled House will extend this aid ranges between slim and none. We saw Slim at the train station this morning…he’s leaving town.
Days of reckoning are never “fun” per se. Least of all will these be for the savers and retirees who’ve purchased municipal bonds because they’ve been deemed a safe source of tax-free retirement income for, well, ever.
The iceberg looming beneath the surface: A host of corporate and state pension plans rely on munis too.