New Hit To Strapped States

The Prof · Jan 15, 2011

With the market for municipal bonds tumbling, cities, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress.

The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citing market turmoil.

The market has fallen every day this week, and investors have been net sellers of their holdings in municipal-bond mutual funds for nine straight weeks, according to fund tracker Lipper FMI.

Yields on 30-year triple-A rated general obligation bonds shot higher to 5.01% on Thursday, reflecting a spike in perceived risk, according to Thomson Reuters Municipal Market Data. The last time those bonds yielded 5% was Jan. 30, 2009, during the financial crisis.

Amid the selloff, public borrowers such as states and utilities face a wave of refinancing stemming from deals cut mostly during the crisis. The deals involved letters of credit from banks that were designed to keep financing costs down for government entities in need of cash.

Banks are reluctant to renew the letters of credit in part because of impending rules that restrict the amount of risk they can take.

1. Our staggering state budgets, dreadfully dependent on selling municipal bonds to finance hundreds of billions of dollars of collective debt, are having to reduce their issue and increase yield in order to move them.

2. Ie, investors simply have lost all confidence.

3. Can you blame them?

4. Thus, cities and states and the services they provide are sabotaged.

5. But more serious is the basic issue of SOLVENCY.

6. What a woeful week we all just watched.

7. Yesterday, we learned the failing 50 have been hit with a brand new bill---1.3 billion dollars---brought by the FEDS for interest on the bailouts the burroughs borrowed to stay above UNEMPLOYMENT benefits a few more weeks.

http://www.nytimes.com/2011/01/15/us/politics/15stimulus.html

8. "The states hoped that the economy would have turned around by the time the first interest payments came due."

9. "Or thought that future Congesses might losen the terms."

10. But there's no chance of that from a John Boehner house.

11. And even Ballyhoo Bernanke has stated his stubborn hostility to further bailouts for the Albany's and Bostons.

12. The bulk of our states' fiscal difficulties, by the way, can be summed up in one word: P-E-N-S-I-O-N-S.

13. Equally troubling, AP pointed out Thursday that congressional oversight has found a "sharply reduced chance" of the US taxpayer ever fully recovering the 50 billion it advanced to GM to keep those UAW retirements from rotting entire.

Panel: GM stock sale may trim taxpayer recovery - Yahoo! News

14. The automaker, oversight explains, sold a block of shares at $33 each, "a price far below the break-even point."

15. Thursday, Reuters reported "rising gasoline prices beat down US consumer sentiment in early January."

Rising gasoline prices sour U.S. consumer mood | Reuters

16. "A year end surge in gasoline prices ratcheted up consumer inflation expectations to the highest in more than two years."

17. Another worry awoke Wednesday, when AP's real estate writer warned, "the bleakest year in the foreclosure crisis has only just begun."

Over 1 million Americans seen losing homes in 2011 - Yahoo! News

18. One million American homes were repossessed in terrible 2010, 14% more than in awful '09.

19. And 20% more are forecast for eerie '11.

20. Wednesday, as well, CNBC called out 53 consecutive months of declining home values.

News Headlines

21. "Things were bad but the broader economy never reached Depression territory."

22. "The housing market, on the other hand, just crossed that threshold."

23. No wonder S&P and Moody's on Thursday issued their now standard warning that America's credit rating is at stake.

S&P, Moody's Warn On U.S. Credit Rating - WSJ.com

24. The Financial Times of London, still the most prestigious publication of economic reportage on the planet, admonishes the Fed itself is at catastrophic risk of collapse.

FT.com / Comment / Analysis - America: Paydown problems

25. Last November, FT unfolds, the Fed announced 600 billion of quantitative easing, "on top of the 1.7 trillion dollars in Treasuries and mortgage-backed securitites" it's already absorbed.

26. "The Fed's purchases of Treasury debt and mortgage-backed [garbage] have effectively turned it into a mammoth investor---a THOROUGHLY UNDIVERSIFIED one."

27. What's rule 1 for prudent investors?

28. FT foresees a flatline fall for the Fed if and when inflation manifests its ferocious face.

29. What a week---housing, gas, consumer confidence, the states, inflation fears and a faltering fed whose main failsafe is keeping its fingers crossed.

30. Spin, anyone?

The Prof