yourgoldteeth

Bond ETFs: Time to Stock Up, As Munis Yield More Than Treasuries

Post busted CDOs I'm not sure I'd count on munis always being made good. I can't remember the exact circumstances, but the city of Birmingham almost went into default a few months ago. What was striking about it was not that they ran into trouble, it was that when the bondholders started making threatening noises, Birmingham told them, hey, back off. We're not going to cut staff just to make our bond payments.

There was actually a quote along those lines from some city official. Maybe he was just the only one running for re-election

I don't keep up with munis, but what's the plan for keeping credit ratings high now that two major insurers are gone? If their business had been viable seems like they'd still be around.

Without somebody to take over that role munis yields might not be coming down as far or as fast as people think.

In fact, if we get a few more Birminghams, and if they can't be bailed, they muni yields may be going up. If one of these cities actually defaults, maybe way up.

In the brave new world created by the bankers munis may not look quite as attractive side to side with treasuries. At least you know, so far, that you're going to get your money back with treasuries.

Did I miss something or did somebody come up with a plan on restoring bond insurance for munis? Without it risk premiums may start heading up if we start getting a few defaults.

And Birmingham may not be the last in line to try that out.

There's the matter of tax assessments. Anybody who walked away from his house isn't going to be paying taxes on it. And there are going to be plenty of people who had their assessments raised who won't be able to pay either - either because they lost, or will lose a job in the coming months, or because interest rates went up, or because it's time to make more than just interest only payments.

The cities and states are going to have a hard time just delivering essential services

We haven't seen the end of write offs from the banks, or any kind of real fallout from the end of the credit party. Just for the heck of it I'll accept the assumption that the U.S. isn't going to go into recession.

There's still going to be fallout from the steadily increasing total on all those bank write offs and the tightening that's set in.

Then there's inflation. The Fed seems to have figured out that there is inflation out there - and they're now making noises about no more cuts to stave it off. So there's no help for the hapless homeowner with his adjustable rate, or with stimulus to help him get reemployed if he loses his job. Hope he's got plenty socked away for house payments.

Just because the Fed has decided that it is not going to acknowledge the contribution of the price of oil to the inflation rate doesn't mean that it is going to change the dynamics of what oil at current levels will do to the economy.

If the price of oil doesn't come down and stay down soon the mood is going to get a little dark out in those subdivisions that take an hour to drive to work from.

Maybe they can help move the houses out there by giving away one of those SUVs nobody wants to buy with each one purchased, and keep defaults down, so the folks'll still pay their taxes and the cities can make those bond payments.

Maybe I've got this wrong, but I thought that the fundamental assumption behind mean reversion was that the world hasn't fundamentally changed. If the variables that affect price are essentially unchanged, then mean reversion should kick in.

Maybe things haven't changed permanently, but the financial factors that caused the cracks that were heard round the world in the CDO business haven't gone away. Just because the Saudis aren' shovelling money into the banks this week and no major brokerage houses have imploded so far this quarter, I'm not sure we're out of the woods yet.

I think we may end up wandering around in here for a while