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The state of the muni market

I’m not an anti-Obama extremists who hopes he gets assassinated… just an unreal pic

In a recent Fortune article, Meredith Whitney is holding onto her position of a bear market in municipal bonds. Back in December on 60 Minutes, she said that there’d be “50 to 100 sizeable defaults” worth “hundreds of billions of dollars” over the next 12 months. The muni market is worth around $2.9 trillion right now, so hundreds of billions of dollars is… a fuckin’ shitload. While there have been 29 straight weeks of withdrawals from muni-bond mutual funds, actual muni-bond defaults have fallen. From January 1 through April, there were 14 defaults worth around $605 million. That same period in 2010 saw 43 defaults worth around $1.7 billion. So, naturally, a lot of people don’t (and don’t wanna) believe her.

Even though Whitney’s forecast has been condemned for some time, the extent of her firm’s new research might make your ballsack shrink a bit. For instance, since 2003 state outlays have risen from some $1.5 trillion to $2.2 trillion, while tax revenues have increased from $1 trillion to $1.4 trillion. Uh… that is not good. What makes this market different than say, treasury securities, is a muni-bond default is much different than a corporate-bond default. A bondholder can’t force a city into foreclosure, you kind of just have to accept the bond haircut and restructuring if there is no bailout by the federal gov’t. Especially when the economy is in a position like it is now, this uncertainty can more than offset the tax-free attribute of munis. So, if anything, Meredith Whitney telling everyone that there’s gonna be hundreds of billions of dollars worth of defaults could end up being a self-fulfilling prophecy (fuckin’ hate those, right?). Rates are already ridiculously low and we’re not seeing much growth. What happens when they rise due to defaults, and we haven’t even gotten out of the gutter? Don’t expect state debt problems to be solved anytime soon.