The Muni Spike Has Been The Real Unintended Consequence Of QE2

The selloff in municipal bonds last week was presumed to be the consequence of an increase in issuance and crisis level amounts of debt on state’s balance sheets.

But there may be another driver, according to Nomura.

While Nomura does explain away current conditions as being partially a result of a flood of new issuance trying to beat the Build America Bond deadline, their QE2 centric argument is more interesting.

One can circle back to recent Fed policy as being the culprit to partially blame. It is interesting to observe how QE2 is impacting US states, since because most of state funding is done in the 10+ year sector. Since the Fed is not targeting long end paper, yields in this sector have rose, adding interest expense to already weak state budgets.

Chart

Photo: Nomura

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