Whitney Wrong on Muni Market, to a Degree

Defaults didn’t happen, but downgrades did

Meredith Whitney. (Photo: AP)While Bloomberg continues to delight in Meredith Whitney’s bold “prediction-that-wasn’t,” The Wall Street Journal notes she might not be so far off. They admit she was wrong; the massive wave of defaults the famous analyst warned of in her Dec. 12, 2010 interview on “60 Minutes” never happened, but it’s really only a matter of degree.

“Debt issued by municipalities—a category that includes local governments and other affiliated entities like school districts—has returned 10.2% so far this year,” The Journal writes. “That beat out Treasurys, the second-best performer, with a 9.3% return. Riskier high-yield corporate bonds returned 4.2%.”

However, the paper reminds readers that Moody's Investors Service said in November that downgrades outpaced upgrades by a ratio of about five to one, “the highest ratio since the start of the financial crisis. The ratings firm also said it expected the downgrade trend to continue in the coming quarters, as deficit-cutting measures from states and the federal governments take hold.”

“Ms. Whitney and others who predicted munis' demise just had the wrong D-word," Dan Genter, chief investment and executive officer for RNC Genter Capital Management, told the paper. "People need to be focused on downgrades, not defaults," he said.

New issuers appear to have shaken off Whitney’s threat heading into 2012. The Securities Industry and Financial Markets Association on Wednesday released its 2012 Municipal Bond Issuance Survey

Respondents expect total municipal issuance, both short- and long-term, to reach $402 billion in 2012, which the organization calls “a significant recovery” from their expectation of $342 billion in 2011.  Additionally, excluding short-term notes, long-term issuance is also expected to recover in 2012, with a forecast of $347 billion total in 2012 compared with $288 billion in 2011.   

“Despite fiscal difficulties at the state and local levels, the strong issuance forecast underscores the market’s appetite for municipal bonds,” Leslie Norwood, managing director and associate general counsel at SIFMA, said in a statement. “This is still highly dependent upon a number of market-effecting factors including the current fate of the tax-exempt status in current federal fiscal debates.”   

Other highlights from the survey include:  

  • Projected long-term, tax-exempt municipal issuance to total $303 billion in 2012, a 20.2% increase from the $252 billion estimated for 2011;
  • Projected long-term taxable municipal issuance is $35 billion in 2012, a 25% increase from the $28 billion estimate in 2011; 
  • Two-year Treasury note yield is expected to rise gradually from 0.25%  in December 2011 to 0.5% in December 2012; and
  • 10-year Treasury note is also expected to rise gradually in the second half of 2012, with yields projected to climb from 2% at the end of December 2011 to 2.5 % at the end of December 2012.  
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