If there's an unfolding crisis within the $2.9 trillion
municipal bond market
, bond investors certainly aren't acting like it.
Just last week, 128 gutsy gunslinging lenders pieced together $6.1
billion in bids for a $3.7 billion taxable pension bond offering
from the financially troubled state of Illinois. Bonds with a
maturity of 2014 had a 280 basis point spread (2.80% higher) versus
comparable U.S. Treasuries. Sure, bond investors got a juicy yield
from the Illinois deal, but was it enough to compensate them for
the financial risks still ahead?
The aftermath of the
has caused the steepest decline in state tax receipts on record.
And while the need for money to support state funded services
hasn't dwindled, combined state tax collections are 12% lower
compared to pre-recession levels. Despite making severe spending
cuts, most states still face large budgetary shortfalls.
Other heavily populated states like California and New York show
similar signs of financial stress.
For 2011, California has a budget shortfall of $17.9 billion
which represents 20.7% of the state's budget. Additionally, a $8.2
billion shortfall remains open for FY2011. The SPDR Nuveen Barclays
Capital California Municipal Bond ETF (NYSEArca: CXA) has shrugged
off these problems by rising 3.48% year-to-date. CXA carries a tax
free yield of 3.89%.
New York has a budget shortfall of $8.5 billion for 2011, which
is 15.9% of its budget. The SPDR Nuveen Barclays Capital New York
(NYSEArca: INY) is 1.49% lower year-to-date and carries a yield of
Nouriel Roubini, best known for his calls on the 2008 financial
crisis, sees $100 billion in possible munibond defaults spread
across the next five years, according to the Wall Street Journal.
While that's a higher default rate by historical standards, it's
hardly crisis levels. One could say that 'Dr. Doom,' as he's been
called, is slightly more optimistic these days.
The national municipal bond market (NYSEArca: MUB) has gently
risen 1.63% since the beginning of the year.
What about the hotly contested subject of guaranteed pensions to
state workers that critics say are sinking states into fiscal
'Even after the worst market crash in decades, state and local
plans do not face an immediateliquidity crisis; most plans will be
able to cover benefit payments for the next 15-20 years,' said
Alicia Munnell, at the Center for Retirement Research at Boston
College. Office party anyone?
Put another way, states, cities and municipalities still have
another 15-20 years to pretend they aren't in financial trouble. Of
course, the unforgiving moment when interest rates start rocketing
higher, things will change. They always do.