When it comes to munis, David Rosenberg isn’t living up to his bearish reputation, arguing instead that the hype is overblown.
But because of the hype, there are some ridiculously juicy yields on some fairly safe credits.
There is a clear buyers’ strike in the market for state and local government debt that is largely based on fear and misperception. The mass selling of muni’s, which represent the bedrock of the U.S. economy, is incredible ― nine consecutive weeks of net redemptions totalling $16.5 billion ($1.5 billion in the January 15 week). Talk about fertile ground for a huge long-term buying opportunity.
First, even if you buy into the default talk, look at the yield protection you get now. There are some long-term muni’s trading north of eight per cent ― even higher than junk bonds (a premium of over 100bps!). Long-term AAA-rated muni’s are now trading well north of five per cent or 116% vis-a-vis Treasury bonds (typically, muni bond yields are equivalent to 82% of Treasury yields given
their tax advantage). California off-the-run 30-year 6% bonds are now being quoted at a yield premium to dollar-denominated debts offered by the likes of Mexico and Columbia.
Give me a giant break. Even in California, only teachers come in front of bond holders. In other states, the debt holders are the first to get paid. It’s amazing how few people know
The spurious reasons beyond default concerns is that the lower levels of government are saddled with a huge supply calendar (partly because of the expiration of the federal Buy America Bonds subsidy). But in truth, new issuance this year at an estimated $350 billion is lower than the $439 billion in 2010.
If we are talking about looking for what is S.I.R.P.-like (safety and income at a reasonable price), investors should screen for:
Regions with a manageable refinancing calendar, A or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases. And best to concentrate on bonds backed by a non-cyclical revenue stream like water and power.
And have a read of Older Workers Are Keeping a Tighter Grip on Jobs on page B3 of the Saturday NYT. As we have long argued, the prime reason for this phenomena is that the boomers increasingly need income as an antidote to this last decade of lost wealth. And right now, in the muni space, we may well have the most compelling opportunity to add income to portfolios since the rapid
meltup in corporate bond yields in late 2008.
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