A penny for .....
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.