PIMCO Explains Why Meredith Whitney And The Muni Haters Have Blown This Crisis Way Out Of Proportion


The muni market needed re-pricing, but now it has gotten way out of control, according to PIMCO’s Christian Stracke and Joseph Narens

The pair explain that what’s happening right now in the muni market makes a certain amount of sense. It’s a bit like last year, when the market repriced sovereign risk to act like a credit product, rather than an interest rate product it was previously valued at. That meant yields were higher and the cost to insure the debt rose too as a result of investors realising that, yes, a sovereign could actually default.

Now that’s happening with muni bonds, but it has gotten completely out of control and there’s multiple reasons why.

  • Median state debts are around 7.3% of gross state product; with local governments tacked on it is a bit above 18%. This is not comparable to sovereigns, but it shows it’s not too big.
  • The average maturity date of muni debt is 16.2 years, giving some time and delaying rollover risk for the broader market.
  • Muni interest costs are actually costing states less, not more, compared to history.
  • Small municipalities may face imminent cash flow problems, but this isn’t likely to be a broad problem.
  • Public pensions — which may eventually be a serious issue — are not yet ready to cause a significant threat.

So, while there may be some imminent problems to smaller municipalities, there is no reason to start thinking mass default. Rather, this is just an appropriate adjustment to a market’s risk dynamics.

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