Municipal Bond Market In Disarray
Written on March 4, 2008 – 10:40 pm | by admin
As the big financial institutions in the U.S. continue to jealously guard what cash they have on hand, we see another shoe drop from the subprime fiasco as another niche credit market locks up (from Bloomberg):
Auction-Rate Bond Failures Approach 70%, Show No Sign of Easing By Michael McDonald March 5 (Bloomberg) — Auction-rate bond failures show no sign of abating after investors abandoned the market for variable-rate municipal securities. Almost 70 percent of the periodic auctions in the $330 billion market failed this week as investment banks stopped buying the securities investors didn’t want. Yields on the debt averaged 6.52 percent as of Feb. 28, up from 3.63 percent before demand evaporated in January. States from New York to California and lawmakers including House Financial Services Committee Chairman Barney Frank are attempting to revive the market. Rising yields are pinching state and local governments just as a slowing economy and falling property values slash tax revenue by more than $6.6 billion, according to a report by the U.S. Conference of Mayors. “Even if the auction-rate market survives, we’re not going to see the kind of rates we’re used to,” said Roger Roux, chief financial officer at Rady Children’s Hospital in San Diego, which spent an additional $940,000 on its auction bonds since rates reset as high as 15 percent last month.
As I stated before, I think we are going to see some state & municipalities go bankrupt as their interest costs on their previously-issued bonds skyrocket. As property values decrease, states & municipalities are going to either (A) raise taxes extremely aggressively in order to pay these higher interest costs, (B) significantly reduce their promised levels of service in order to compensate for less money filling the coffers coupled with higher interest costs or (C) declare bankruptcy. Unfortunately, I think we are headed towards (C) as no modern U.S. politician (except Ron Paul) seems to have the wherewithal to step up and cut services when faced with financial reality.