"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted. Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."
The day of reckoning has arrived. That’s it. And it’s gonna arrive everywhere. Timing will vary a little bit, depending upon which state you’re in, but it’s comin’.
There have been six or seven municipal bankruptcies already. I think unfortunately you will see more. If you are an investor in municipals, you should be very, very careful.
- New bond issuance has shrunk dramatically in the first quarter. The muni market had its lowest quarterly issuance volume in over ten years. Some analysts expect total new issuance in 2011 to be less than half of last years.
- Part of the reason for the lower bond issuance last quarter is a reaction to the especially heavy issuance in the fourth quarter of 2010 when the Build America Bonds program expired.
- State and local governments have also been cutting back on non-essential capital projects and have much improved their fiscal discipline.
- The decline in new issue volume is helping to sustain muni bond prices and reduce yields.
- State and municipal revenues have been improving at a steady rate. Furthermore, state and municipal payrolls have been reduced by 400,000 people in the last three years. Good progress is being made on both the revenue and expense side.
- The changing political climate has given state governors more political “backbone”.
- The state and local government “bankruptcy” option appears to have been taken off the table.
- It looks more likely that Federal tax brackets will be rising which will increase demand for municipal bonds.
- Municipal bond fund redemptions have been gradually decreasing as most of the “weak hands” have already sold. I believe we will start to see muni bond fund inflows shortly as confidence returns.
Municipal bond defaults actually declined dramatically in the first quarter of 2011 compared with last year. According to Reuters, there have been no major defaults thus far this year. Only nine small issues have failed, totalling $0.25 billion compared to about $1 billion last year. None of the nine issues had an S&P rating.
- NPM: EPS= $0.0811 Dist= $0.0740 UNII: $0.2120
- NPF: EPS= $0.0793 Dist= $0.0725 UNII: $0.2234