Tuesday, November 16, 2010

Municipal Bond Massacre

Municipal Bonds don't make the news like the stock market.  The total market cap of the U.S. market is just over $13 Trillion, and the total market cap of the U.S. Muni Bond market is just under $3 Trillion.

Well, it was just under $3 Tril.... yesterday and a few days last week saw that market lose 10% to 12% of its market value by my crude reckoning (because the vast majority of bonds don't trade on a regular basis I used the big closed end muni bond funds as an indicator).  BTW.... in the last 2 months the U.S. Treasury Long Bond is down about 15%, and the 20 year (as measured by TLT) is down around 13%.  Care to guess how much more the MBS bonds are down?  Hard to tell because it seems the government owns them all and they ain't (can') selling.

If the goal of QE2 was to bring down interest rates (which means raise bond prices) by any objective measure it has been an abject failure (actually, it has been an unmitigated disaster).

Why all of this has not leaked into the U.S. equity market is beyond me... but I would not be a hero.  Kinda sorta feel the same way about commodities here, too.

Over the past couple of years tons and tons of money has come into these bond funds from investors trying to acquit themselves of the equity market's volatility... when they get their statements over the next month or 2 there's a pretty good chance some of what's left of that money (about 88%) is going elsewhere.  This will cast a further cloud over the QE2 nonsense... not to mention create quite a headwind everywhere else.

Forewarned is forearmed.


Dextred1 said...

With Greece, munis, QeII and Ireland something is likely to go Kaboom very soon. Surprised it took so long, but no one really wants to see the wizard exposed because he is powerless when revealed. This is what is expected in any fiat money scheme. We just carried the water longer because we were lucky enough to be the reserve currency.

Greg T. Jeffers said...

Hey Dex:

Keep in mind that California is 10X the PIGS.

Greg T. Jeffers said...

perversely... this should be $ positive

Dextred1 said...

I think no bailout and hence they will just have to cut, cut, and cut some more. I don't even think it is that big of deal. In michigan we have been cutting for like 8-9 yrs now. The made their bed. Our revenue was around 12 billion a yr in 99 and is around 7 billion a yr now. If you add in inflation then we have the same adjusted revenue as 1967 (page 15 http://www.senate.michigan.gov/sfa/Publications/Issues/StateRevenueTenYears/StateRevenueTenYears.pdf)

Point being that the cuts our not really that big of deal if the scum unions (I mean that too, at least here) step to the side and let the state make required cuts.

Anonymous said...

If you take the states most likely to default, CA NY IL and MA, and rearrange the letters you get the words Manic Lay. There are others, but these words are the most fun.

So, when Greece blew up, the dollar rose, but treasuries fell because of the flight to safety. Ireland and Portugal are on the verge, as well as the Manic Lay states, yet treasuries are rising. What else is going on? Is it just the run up to QE2 overshot the mark, or something more?


Coal Guy