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Local Budgets

The panic lurking in the municipal bond market

Heidi Moore Jan 26, 2011
Local Budgets

The panic lurking in the municipal bond market

Heidi Moore Jan 26, 2011


Kai Ryssdal: Nassau County on Long Island, just east of New York City, is in a little bit of a jam. It can’t seem to handle its own finances, despite being one of the richest places in the country. A state oversight board took control of Nassau County’s books today, just the latest in a long list of troubles for state and local government finances.

Our New York bureau chief Heidi Moore’s here to discuss. Hey Heidi.

Heidi Moore: Hi Kai.

Ryssdal: So we’re going to take this news out of Nassau County, N.Y., today and turn it into a conversation about the municipal bond market and some of the perils that are lurking there now. First of all, though, remind us what munis are, would you?

Moore: A municipal bond is just a bond that a city or a state issues so that it can raise money for education or water or sewage or all of those other really necessary support services that we all take for granted.

Ryssdal: And as an investment opportunity, and as a way that they play out through the whole economy, they’re in 401(k)s, they’re in pensions funds — they’re everywhere.

Moore: That’s right. They’re tax-exempt. So they’ve traditionally been considered a really safe investment. And generally they always pay. But in the past two months, we’ve seen a panic in the muni market, and they’re not looking as good as they once did.

Ryssdal: OK. Why? Why are we seeing that panic? Strong word, by the way.

Moore: But that’s exactly what it’s been. There have been so many investors selling out of their muni holdings that we have lost about one-third of all of the investments that have been put in the muni market since January 2009. And it’s hard to say what the cause of it is. A lot of panics are psychological, but a lot of people worry that it might be about upcoming state budgets, which are going to be quite a fight. A lot of states are cash-strapped right now, and they may not want to raise taxes, and they’ll have a lot of trouble squaring their revenues with what they’re spending, particularly on pensions.

Ryssdal: OK, so play that out for me a little bit. If, let’s just say Nassau County wants to sell some municipal bonds, it is in the marketplace now — not only competing with that panic but also literally other investors — Joe Blow and Scherboykin who has a muni bond who he wants to sell, right?

Moore: And that’s a big problem for these municipalities, because they’ll still need to raise a lot of money this year. In fact, more money than they did last year. But as we’ve talked about, there’s a panic. So demand is likely to be low. And we also have Build America bonds, which were very popular and which took a lot of that demand out of the market.

Ryssdal: Those bonds as part of the stimulus program.

Moore: That’s right.

Ryssdal: You are working on a story about state bankruptcies, and I don’t want to steal your thunder here, but all this chatter that’s been out their about state bankruptcies has also been affecting the muni market.

Moore: Primarily, for the worst. Because the worst thing that you want to think about when you are buying a municipal bond, is that there might be a default. That that municipality would not be able to pay you back what it owes you. And there are rules: states can’t default, for instance. So generally, munis have been safe. But this year, there’s this talk of bankruptcy. It’s not coming from the states, God knows, because they don’t want anyone thinking they can go bankrupt. But Congress is thinking about putting these precautions into effect so that states could have a better negotiating position when they want to cut pensions or other state services.

Ryssdal: In theory, saying, hey if you don’t help us out with these negotiations, we’re just going to declare bankruptcy and you’ll be on your own.

Moore: Exactly. It’s the nuclear option.

Ryssdal: Heidi Moore, our New York bureau chief. Thanks Heidi.

Moore: Thank you Kai.

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