Thursday, February 26, 2009

The Debts of the Spenders: California Welfare Meets Muni Bond Vigilantes

California, the gleaming tomorrow encapsulated in Silicon Valley, the paparazzi glare of flashbulbs going off in Hollywood premiers, and the rich earth of fertile farmland.

Now add the desperate pleas for assistance from state legislators and speculative bond vultures.

"The worst financial crisis in seven decades is forcing thousands of previously middle-income workers to seek social services, overwhelming local agencies, clinics and nonprofits. Each month 16,000 people, including many who were making $60,000 to $100,000 annually just a few years ago, fill four county offices requesting financial, medical or food assistance.

“Unless we do things differently, not only will we continue to be on life support, but the power to the machine is going to die,” said county Supervisor Federal Glover, who represents Antioch and the cities of Pittsburg and Oakley about 50 miles (80 kilometers) east of San Francisco.

Meanwhile, in muni bond land prices have fallen and effective yield has risen. The bond vigilantes, formerly confined to Treasuries have emerged into the formerly pristine pastures of highly rated muni bonds. I say "pristine" because until recently muni bonds were considered a "safe harbor" investment for the wealthy. Muni bonds are a conservative investment that pay out relatively low interest w/tax free status. Default rates have remained low but rising fears of i) local governments' inability to repay; and ii) inflation risk are deterring some muni bond investors.

Nothing has really changed for the better since I wrote about muni bonds last year:

In fact, the situation continues to deteriorate. California munis are not trading at CDO level yet but they have suffered significant setbacks in price.


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