Municipal Bonds: Derailed

SmartMoney via Fidelity.com ^ | May 15, 2010 | Russell Pearlman

[mlocher]

It looked like the closest thing you could get to a sure bet — even in a city full of one-armed bandits. The state of Nevada planned to build a sleek, automated monorail that would ferry millions of tourists up and down the famed Las Vegas Strip. And they were funding it by selling more than $600 million in municipal bonds — some of them paying a hefty 7.5 percent in interest. With AAA ratings, they were the very definition of “safe” muni bonds.

But something funny happened on the way to the casino. Fewer tourists came to Vegas, and those who did weren’t up for a train ride; the monorail brought in far less revenue than expected. The nonprofit monorail agency filed for bankruptcy-court protection earlier this year. As for investors, not only have their interest payments dried up — the project’s bankruptcy attorney confirms that it won’t make its next payment, on July 1 — but they could lose almost all of their principal. The stranded buyers include top fund companies like New York–based DWS Investments. Its $6 million stake was a tiny fraction of its $1.6 billion DWS Scudder Strategic High Yield Tax Free fund, but manager Phil Condon still seems flummoxed. After all, such a disaster in a highly-rated municipal bond is almost unheard of. “We’re not perfect,” Condon says.

Neither, it turns out, are muni bonds. A once-stable class of investments built on the nation’s roads, sewers and schools is beginning to look as shaky as, well, many of the nation’s roads, sewers and schools. In recent months, of course, investors have seen apocalyptic headlines about all kinds of government-issued bonds — starting with those from Iceland and Greece, foreign nations stuck with tremendous debt and nowhere near the revenue to pay it off.

[NVDave]

I have some thoughts on the muni market in broad view, and a specific comment on the monorail bonds.

The broader comments.... ping me later on tonight and I’ll write something up. I’m just dashing this off in the midst of my ‘honey-do’ list for today.

On the “AAA” monorail bonds.

a) you should take the ratings with with a huge sack of salt. The ratings agencies are criminally suspect in their ratings on most all things now, and whenever the crap hits the fan, they’re always, always at least a day late. Literally. Look at how long they took to downgrade sovereign debt in Europe this spring...

b) Put aside the ratings when you’re looking at bonds. Look at the yields or the price of the bond vs. benchmarks (or similar bonds from other states when when we’re talking muni paper). 7.5% on a muni bond is OUTRAGEOUSLY high yield. When I saw this paper, I was gob-smacked by the yield. That sort of yield is usually only seen in the commercial paper market on semi-junk to junk debt. This sort of yield isn’t often seen on muni paper, much less “AAA” muni paper.

So which way did it go? The AAA route or the semi-junk to junk route? Looks like the latter, yes? So the market told you more about the suitability of the paper than the ratings agency ratings.

Lastly, on the Ambac insurance issue:

Lots of muni paper is “insured” by outfits that are either effectively dead or in dire straights. Many of these “monoline” insurers also dabbled in backing CDO’s and RMBS instruments, which is the cause of their demise. Your best insurance now against a default is a “GO” or “general obligation” bond, where the sovereign has the ability to raise tax rates to cover the bond.

[Vendome]

Palm Desert, Palm Springs, Rancho Mirage, etc.

Just beautiful. During the summer, just damn hot. Been there many times.

I went for the first time during Christmas and didn’t realize it actually snows on the mountains!

Just always thought it was hot.

The dust storms can be pretty ridiculous.

Experienced my worst dust storm this past December and what a doozy! You couldn’t see anything, if you were on the freeway, which fortunately my friends who live there knew better.