Are you concerned about muni defaults?

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Dec 5, 2009 10:36 pm

Hello again, just gauging opinions on potential muni bond defaults. I know historically they've had very low default rates (I'm talking single-A rated and above), but with the recent $hit storm, just curious about your thoughts. Personally, I've only been offering AA- or above, and of course I diversify across states & maturities. By the way, I am mostly talking about Build America Bonds.

Really - are those of us who have been selling them going to look pretty good down the road, or will we be making the same type of calls that we did on GMAC, Lehman, and CIT bonds?
Are you all offering them? Are you offering California bonds, yielding of 7%, some of which are insured? (I know, insurance plus a dollar will buy you a coffee at McDonalds).
Let's hear it; thanks.
Dec 6, 2009 7:34 am

Keep in mind that "default" occurs when the municipality is late for just one payment. That can happen, and probably will happen, in many towns due to a sudden unexpected drop in revenue.

The greater concern you can address is loss of principal. From what I understand, even during the great depression, no BBB or better Muni's experienced a lost of principal. I believe the municipality has the responsibility to raise taxes as much as necessary to pay off obligations (unless stated otherwise in the bond offering). The municipality could keep raising taxes until property values reach $0.

The risk of this occurring would be high for a small town with low education levels, one coal mine and all other business support the mine - and the mine goes out of business.

The risk of this occurring is extremely low in a town with decent education levels, several industries and businesses. And a few Federal & State government offices.

This is how I see it...anyone else?

Dec 6, 2009 3:27 pm

Also bear in mind that much of the fear of California bonds is irrational. First and Foremost is that the California State Constitution makes it illegal for a state of CA bond to not repay principle. They MUST pay their debts or lay off / fire enough employees or cut programs to make those payments.

 
I'm using this time to reap the benefits of this irrational fear of CA GO Bonds.
Dec 6, 2009 4:42 pm
[email protected]:

Keep in mind that "default" occurs when the municipality is late for just one payment. That can happen, and probably will happen, in many towns due to a sudden unexpected drop in revenue.

The greater concern you can address is loss of principal. From what I understand, even during the great depression, no BBB or better Muni's experienced a lost of principal. I believe the municipality has the responsibility to raise taxes as much as necessary to pay off obligations (unless stated otherwise in the bond offering). The municipality could keep raising taxes until property values reach $0.

The risk of this occurring would be high for a small town with low education levels, one coal mine and all other business support the mine - and the mine goes out of business.

The risk of this occurring is extremely low in a town with decent education levels, several industries and businesses. And a few Federal & State government offices.

This is how I see it...anyone else?

You have no idea what you are talking about...
 
That is why there are GO bonds.... Sure EDJ stadium can raise prices/taxes but if no one goes to the games because the team sucks it doesn't matter.
Dec 6, 2009 4:43 pm
Renter:

Hello again, just gauging opinions on potential muni bond defaults. I know historically they've had very low default rates (I'm talking single-A rated and above), but with the recent $hit storm, just curious about your thoughts. Personally, I've only been offering AA- or above, and of course I diversify across states & maturities. By the way, I am mostly talking about Build America Bonds.

Really - are those of us who have been selling them going to look pretty good down the road, or will we be making the same type of calls that we did on GMAC, Lehman, and CIT bonds?
Are you all offering them? Are you offering California bonds, yielding of 7%, some of which are insured? (I know, insurance plus a dollar will buy you a coffee at McDonalds).
Let's hear it; thanks.
 
I think the Build America Bonds are fine for one reason and it is pure philosophical... The governement won't let something called "Build America" default..
Dec 6, 2009 5:10 pm

I think sticking with entities that have the ability to raise taxes vs. some project like a convention center etc. regardless of the ratings would be prudent. The muni insurers are all but devastated and the rating agencies are liars.

Dec 6, 2009 6:24 pm
Squash1:
[email protected]:

Keep in mind that "default" occurs when the municipality is late for just one payment. That can happen, and probably will happen, in many towns due to a sudden unexpected drop in revenue.

The greater concern you can address is loss of principal. From what I understand, even during the great depression, no BBB or better Muni's experienced a lost of principal. I believe the municipality has the responsibility to raise taxes as much as necessary to pay off obligations (unless stated otherwise in the bond offering). The municipality could keep raising taxes until property values reach $0.

The risk of this occurring would be high for a small town with low education levels, one coal mine and all other business support the mine - and the mine goes out of business.

The risk of this occurring is extremely low in a town with decent education levels, several industries and businesses. And a few Federal & State government offices.

This is how I see it...anyone else?

You have no idea what you are talking about...
 
That is why there are GO bonds.... Sure EDJ stadium can raise prices/taxes but if no one goes to the games because the team sucks it doesn't matter.


You tell me I have no idea what I'm talking about; then you compare munis to a high-risk business model as an example...you should probably think before you respond.

A diverse, educated community economy is much more stable than a stadium...although, I think that's exactly what I already said.

Dec 6, 2009 7:45 pm
AGEMAN:
BioFreeze:

I pray for muni defaults. 

You are clearly an idiot!  I hope you are joking!  If conservative investments such as munis are going under that means that similar conservative investments backing the claims paying ability of the insurance companies that you represent will be worthless and you will be in trouble also.

 
Ageman, the difference is that the insurance companies actually have the money to pay the claims.
Dec 7, 2009 5:48 pm
iceco1d:

It's good to see this forum is back to normal.  No more troll threads; some of the newer, more "controversial" members have gone MIA, and the fart jokes have almost completely disappeared... just good ole fashion industry-related threads where we constantly criticize the minute details of each others posts, along with some prototypical "EDJ is best for some people vs EDJ is a sham for everyone" debates!    Glad the forum is back boys & girls.  

 
AMEN!
Feb 15, 2010 7:03 pm

Muni defaults are inevitable...Renter, time to read those y2K books you offered me, there you can contemplate the lost decade, as well as the end of the world as YOU know it.

Feb 15, 2010 8:42 pm

How are muni defaults inevitable?

Feb 15, 2010 9:45 pm
Jonesness:

Muni defaults are inevitable...Renter, time to read those y2K books you offered me, there you can contemplate the lost decade, as well as the end of the world as YOU know it.

 
oooooooo! scary. Not only have I contemplated the lost decade, I lived through it while being in this business. You know what the other lost decades were followed by? FOUND decades! YAY! Why bother reading the Y2k books? The banks didn't close; the electric grid didn't fail; computer controlled cars didn't drive off the road. WRONG WRONG WRONG! As someone already asked, if you really believe all this, then how can you be in this business?
 
Listen - the world has had invitations to end NUMEROUS times. It hasn't ended yet. Yes, it's going to END sometime probably; most people think it's going to be during THEIR lifetime. So far EVERYONE who has said it was wrong. When it's time, it's time. Although it won't be fun, I'm ready.  My advice: forget all the doomsday books. So far, 0% have been right. Pray like it's the end of the world, but invest like it's not.
 
Feb 19, 2010 11:41 pm
anonymous:
AGEMAN:
BioFreeze:

I pray for muni defaults. 


You are clearly an idiot!  I hope you are joking!  If
conservative investments such as munis are going under that means that
similar conservative investments backing the claims paying ability of
the insurance companies that you represent will be worthless and you
will be in trouble also.

 
Ageman, the difference is that the insurance companies actually have the money to pay the claims.





We, as professionals, understand that I would rather have my money in a
company like NY Life or NWM than a bank with FDIC coverage.  But the
question is does the average consumer? So we have municipalities
defaulting left and right and clients are panicking . . .We talk to the
client: "I completely understand how you feel Mr. Client.  It is pretty
crazy that the wonderful state/city of xyz is defaulting on their
obligations.  And I know you have heard that municipal bonds are the
next safe thing next to US government bonds.  So why don't you put your
money in XYZ insurance company because trust me, they're triple A rated
and have 17 billion in assets even after they pay off all their
liabilities". 



Do you really think the average person is going to be like "Gee, I guess you're right Mr. Insurance Agent"?

Feb 20, 2010 9:07 pm
army13A:
anonymous:
AGEMAN:
BioFreeze:

I pray for muni defaults. 


You are clearly an idiot!  I hope you are joking!  If
conservative investments such as munis are going under that means that
similar conservative investments backing the claims paying ability of
the insurance companies that you represent will be worthless and you
will be in trouble also.

 
Ageman, the difference is that the insurance companies actually have the money to pay the claims.





We, as professionals, understand that I would rather have my money in a
company like NY Life or NWM than a bank with FDIC coverage.  But the
question is does the average consumer? So we have municipalities
defaulting left and right and clients are panicking . . .We talk to the
client: "I completely understand how you feel Mr. Client.  It is pretty
crazy that the wonderful state/city of xyz is defaulting on their
obligations.  And I know you have heard that municipal bonds are the
next safe thing next to US government bonds.  So why don't you put your
money in XYZ insurance company because trust me, they're triple A rated
and have 17 billion in assets even after they pay off all their
liabilities". 



Do you really think the average person is going to be like "Gee, I guess you're right Mr. Insurance Agent"?



Love the tagline, army!

Feb 21, 2010 9:02 am

Interesting discussion so far.


Will some munis default? Probably. Can we control that? Nope. So I try to focus on the aspects I can control.
 
What I do is pretty basic - construct a proper ladder (no more than $10k in any one bond), stay with "A"-rated or better bonds, and try to find insured ones or prerefunded ones where you can.
 
Bond funds or CUT's/MUT's may also be a good way to deal with the default risk on individual bonds.
Feb 22, 2010 11:29 pm
army13A:
anonymous:
AGEMAN:
BioFreeze:

I pray for muni defaults. 

You are clearly an idiot!  I hope you are joking!  If conservative investments such as munis are going under that means that similar conservative investments backing the claims paying ability of the insurance companies that you represent will be worthless and you will be in trouble also.

 
Ageman, the difference is that the insurance companies actually have the money to pay the claims.



We, as professionals, understand that I would rather have my money in a company like NY Life or NWM than a bank with FDIC coverage.  But the question is does the average consumer? So we have municipalities defaulting left and right and clients are panicking . . .We talk to the client: "I completely understand how you feel Mr. Client.  It is pretty crazy that the wonderful state/city of xyz is defaulting on their obligations.  And I know you have heard that municipal bonds are the next safe thing next to US government bonds.  So why don't you put your money in XYZ insurance company because trust me, they're triple A rated and have 17 billion in assets even after they pay off all their liabilities". 

Do you really think the average person is going to be like "Gee, I guess you're right Mr. Insurance Agent"?

 
If you asked 100 people this 99 would go with the bank. The stupidity out there is unreal. I bet 50 of those same people would take a CD at a lower rate than a government bond for the same term and better rate.