Meredith Whitney made her name by (correctly) trashing Citigroup.
You can read her original report here.
Well, now she’s at her own shop, and attempting to make a second “career call” with her predictions of muni bond doom. We’ve covered it pretty extensively, and a key thing is that while many people agree with her about stresses in this market (and even more defaults), very few see the outright doom scenario that Whitney does.
Add Citigroup (and analyst George Friedlander) to the list of her opposers. In a note that was put out Friday, the firm specifically calls out media-borne hype, and claims that the selloff is the result of a feedback loop.
Here’s ow the feedback loop works:
- Muni bonds start to fall in Novemer due to fears over the expiry of the Build America Bond program, and thus the rush to increase issuance under this program (government backstops for munis). Also rising Treasury yields took away luster from munis.
- Then it became clear that BABs were dead. More muni selling.
- Then the doom and gloom reports really started hitting the media. That lead to selling of bond funds.
- Meanwhile, the market was already vulnerable due to a thin investor base.
- The selloff, then has lead to more selloff fears, and bond redemption issues, etc.
The bottom line, says Citi, this panic selling isn’t justified by the actual likelihood of default.
In the meantime, Citi sees huge opportunities in areas like:
- State GOs rated AA- or better;
- Essential service revenue bonds rated A1/A+ or better;
- Other well-secured revenue bonds, such as AA3/AA- or better hospitals; and
- Any solidly rated strongly secured GO issues or Revenue Bonds— whose price comes under pressure because of a supply/demand imbalance, rather than as a result of bona fide changes in credit condition.
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