Like much of the rest of the market in recent days, the municipal bond sector saw a sell-off. Fear of another credit crisis is a driving force, so much so that one large bank took steps to stem the tide. According to “State Street Temporarily Stops Cash Redemptions For Muni-Bond ETFs,” Wall Street Journal reporter Chris Dieterich wrote on June 21, 2013 that State Street Global Advisors “told Wall Street trading desks Thursday that it would only accept so-called ‘in kind’ redemptions for its suite of muni-bond ETFs” or exchange traded funds. The article adds that cash redemption requests were allowed a day later.
Expect more municipal fixed income market news as things change.
Rising interest rates could thwart a year-long “surge of refinancing deals,” especially for those issuers that are saddled with large unfunded pension liabilities. See “U.S. muni bond sales to total $14 billion next week,” Reuters, June 21, 2013. Should that occur, taxes could be pushed upwards which in turn will likely lower disposable income, job creation and overall economic growth.
Friction between bondholders and pension trust participants is another significant eye-opener for municipal bond issuers and investors alike. In “State of pay” (June 22, 2013), The Economist talks about restructuring deals for the City of Detroit and California cities that include Stockton, Vallejo and San Bernardino. Central Falls, Rhode Island, Jefferson County, Alabama and Harrisburg, Pennsylvania are cited as other examples of municipal bond issuers that have sought protection from creditors by filing for Chapter 9 status.
So what does this portend for the nearly $4 trillion muni-bond market?
In an interview with Forbes, investment guru and author of Fate of the States: a New Geography of American Prosperity, Meredit Whitney, paints a stark picture. While I have yet to read her tome, others are snapping up the book in droves. It is a top 100 seller in the Kindle store and #4 in Business & Investing, Economics, Economic Conditions on Amazon.com. She makes a point that will continue to resonate in my view. Specifically, it is a question about the various contracts in place that include, but are not limited, to the following:
- Bondholders versus taxpayers with the latter group likely to have to pay higher levies;
- Public employees who do not want rescinded benefits versus taxpayers who want to cut costs; and
- Teachers and parents who want more money spent on education versus those who favor police, fire and sanitation services to dominate limited budgets.
Social contracts and legal contracts appear to be in the process of being rewritten forever. As I predicted in “Tea Party Redux: State Pensions in Turmoil” on July 27, 2006, “Nothing is ever free. Someone, somewhere, somehow, pays the bill. How will politicians respond? After all, grumpy taxpayers tend to vote.”