The db X-trackers Municipal Infrastructure Revenue Bond ETF (the "Fund") seeks investment results that correspond generally to the performance, before fees and expenses, of the DBIQ Municipal Infrastructure Revenue Bond Index (the "Index"). The Index is designed to track the returns of the segment of the U.S. long term tax-exempt bond market, consisting of infrastructure revenue bonds.
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Retail investors are likely to see about twice as much in "leakage" when buying and selling municipal bonds as they do for corporate paper, according to the WSJ, and regulators - who bypassed the municipal market while helping reshape how Wall Street works - have this asset class in its their sights.
"We spend an awful lot of time on the equities side of the market where spreads are counted in pennies - and in the muni market, spreads are counted in dollars," says SEC Commissioner Michael Piwowar.
For their part, brokerages say munis cost more because they trade in lower volume and for smaller amounts than other securities.
"You think of how the retail industry has gone from the local grocery store to Wal-Mart to Amazon," says a municipal bond wealth manager. "In municipal bonds, we're still shopping at the local grocery store."
Puerto Rico's $3B debt issuance could happen as soon as tomorrow, reports Bloomberg. It would be the U.S. territory's first sale in two years and follows a cut in its credit rating to junk last month (by all three major agencies)
The muni market overall is expected to see $11B in long-term offerings this week, the busiest pace since late last year as 10-year muni bond yields fall to their lowest level since June.
Closely watched in the municipal bond market and by the monolines (MBI, AGO, AMBC) will be today's decision by a U.S. bankruptcy judge on whether Detroit's pledge to pay on general obligation debt is binding or whether it's merely a promise which a broke city can walk away from.
The impact could be a large one as GO debt has forever been considered secured debt and thus among the safest places to put money. Emergency manager Kevyn Orr has deemed about $410M of city GO paper as unsecured debt, and Detroit on October 1 defaulted on payment.
On the hook for millions of dollars, municipal insurers contend they and bondholders have first call on the property tax revenue necessary to make good on the bonds.
Also maybe coming today will be Orr's plan for restructuring and a bankruptcy exit.
Fitch becomes the 3rd and last of the major ratings agencies to cut Puerto Rico's municipal debt to a junk rating. "Recent downgrades have triggered new liquidity requirements and lowered expectations for the market available for the commonwealth's debt going forward."
In the meantime, Puerto Rico is going through with its debt offering, and has hired Barclays to lead the sale.
The junk ratings look to be forcing about $13B of Puerto Rico's $70B in muni debt out of Barclays' benchmark municipal bond index, and passive ETFs will likely be forced sellers of Puerto Rican paper, though most mutual funds can continue to hold.
Moody's says Puerto Rico's economic malaise, underfunded pension obligations and high deficit "have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained."
The Moody’s downgrade pertains mostly to the GO bonds, which effectively triggers downgrades on all subsequent notes and bonds.
Morgan Stanley (MS) has contacted hedge funds, private-equity firms and other large investors to see how interested they would be in providing $2B in financing to Puerto Rico in return for yields as high as 10%, the NYT reports.
The Commonwealth hasn't actually hired Morgan Stanley, which is acting on its own to put together a proposal that the bank can take to the government.
Puerto Rico is struggling with high unemployment and massive debt, and is facing a downgrade into junk territory from Moody's. Such a move would accelerate $1B of payments.
Complicating matters is that the Commonwealth can't file for Chapter 9 bankruptcy protection.
It was just a tiny $103M, but municipal bond mutual funds and ETFs last week ended a streak of 33 consecutive weeks of outflows, according to Lipper. The $103M gain compares to outflows averaging $1.5B-$1.9B over the previous month.
The value of municipals - with longer-dated high-grade paper trading above that of comparable Treasury issues (and that doesn't include adding back the tax benefit) - has been noted often (here and here for example) over the past weeks, and many closed-end funds are trading at discounts to NAV.
Ranking about dead last a year ago in Barron's handicapping of where to go for yield, municipal bonds climb nearly to the top for 2014. Long-term issues yield 4.5-5%, towering over the 30-year Treasury at 3.8% ... and don't forget the tax exemption. Credit worries are high, but the "real news is that the credit profile of local governments throughout the U.S. will improve as property valuations rise, local sales and income-taxes increase, and major reform of public employee pension plans accelerates," says John Loffredo, co-manager of the MacKay Shields Municipal High Yield Fund.
Topping the list are the best performers from last year: dividend stocks. Even after a big rally, plenty of blue chips yield more than the 10-year Treasury and payouts are still low, says S&P's Howard Silverblatt, who sees a double-digit rise in cash payouts this year.
Near the bottom of the list this year after a big move in 2013 are MLPs, which trade for nearly twice the valuation of utilities and telecom, based on Enterprise Value/EBITDA. Yields are tasty at 5.5%, but many MLPs barely cover their payouts - a contrast to the vast majority of dividend-paying corporations. Stick with MLPs comfortably covering their distributions like EPD and PAA.
Municipal debt is down 2.58% so far this year, putting the asset class on course for its worst annual performance since 1994. In contrast, muni debt provided a return of 6.78% last year and 10.7% in 2011.
Detroit's fall into bankruptcy protection has had a major effect, with problems in Chicago, Illinois and Puerto Rico adding to the downward pressure. There's also been a broad sell-off in bond markets as investors have prepared for Fed tapering.
However, municipal debt tied to real-estate development, which is known as "dirt bonds" and is fairly risky, has had a decent year amid the recovery in the housing sector, rising 1.1% through December 23.
The combination of credit issues and rising interest rates have municipal closed-end funds selling at near-record discounts (10%+) to net asset values, says Doug Kass, and at near-record pretax-equivalent yields vs. taxable bonds. Those conditions, says Kass, constitute a margin of safety and he's an owner of: NMA, NAD, ETX, BKN.
Illinois' Senate and House have approved a revamp of the state's retirement system, one of the most underfunded in the country with a gap of almost $100B.
The plan is designed to fully fund Illinois' five pension systems by 2044 by saving an estimated $160B over 30 years. Workers and retirees face cuts, the retirement age for younger staff will rise, and the state will increase its payments by $60-70B.
Unions are strongly opposed to the proposals and intend to go to court to stop them from being enacted. One argument is that the overhaul violates the state constitution by lowering pension benefits.
Still, the Illinois revamp could provide a template for municipalities that are grappling with similar problems. Chicago, which has a pension shortfall of $19.5B, has been watching the situation with interest. (Previous)