A Few Rational Words on Munis

The first, Opportunity in a Muni Maelstrom, discusses opportunities in the market caused by the recent flows out of muni funds. 

• Since November 2011, $38 billion flowed out of muni funds (7% of the tax-exempt bond mutual fund market).
• Outflows caused short-term price distortions, including high-grade credits.
• Article quotes a recent Moody’s study noting that every U.S. state is more creditworthy than 96% of corporate bonds.
• Quotes several market participants dismissing the possibility of widespread muni defaults.

The second, Broke Town, U.S.A., centers on the Vallejo, Calif. bankruptcy case and points to several characteristics of the muni market and local and state government, generally, to dismiss Meredith Whitney’s calls for significant, widespread defaults.

• Unlike banks, government entities are generally not dependent on short-term financing.
• Municipalities carry much less debt relative to the size of their economies than national governments, with annual debt service totaling less than 10% of revenues; quotes Moody’s: “State and local governments really don’t have a crushing debt problem.”
• On unfunded pension liabilities: Notes the cumulative liability is high, but that governments are addressing them; many states are reducing benefits for new employees and asking for higher contributions from employees.
• On the municipal bankruptcy: Points to Vallejo “as an example of why bankruptcy for cities won’t work”; high costs and little benefits to filing.