- MarketBeat (WSJ Blog) – Muni Market Woes?: Blame the Media
Some muni analysts have recently been telling investors that the selloff in the muni market had essentially been ginned up by the news media, thus making it a great buying opportunity. This would make sense, if journalists were to blame for California’s projected $25 billion budget gap or Illinois’ $13 billion budget gap, etc. etc. It would make sense if we hadn’t heard it before, most recently from analysts saying that the financial crisis of 2008 wouldn’t have happened if only the media hadn’t gone and scared everybody about Lehman Brothers. The blame-the-media refrain is similar in nature to blaming shorts for falling market prices or blaming the doctor when you learn you need to cut back on the Twinkies. You can keep buying heavily shorted stocks, or subprime mortgages, or keep eating those Twinkies, ignoring the bad news, but you do so at your peril. In a way it’s not surprising to hear these weak excuses being made for the muni market, which has been rocky for months, often without the media helping or even noticing. But it’s also a little worrying, given how useful such “analysis” has been in the past.
Comment
In a Newsclips post late last week, we asked whether muni outflows were being driven by media hype. We first pointed out that muni performance needs to be viewed relative to Treasuries rather than on an absolute basis. This is shown in the first chart below.
The green line is the Muni ETF (MUB) known as the iShares S&P National AMT-Free Muni Bond Fund. The white line is the long-term Treasury ETF (TLT) known as the iShares Barclays 20+ year Treasury Bond Fund. The chart starts on November 10, the week before the first weekly outflows from muni bond mutual funds (second chart down).
Municipal bond indices have a duration of more than 11 years and an average maturity of more than 20 years. So, the best comparison is a long Treasury index.
This chart shows the selloff in municipal bonds is almost identical to the selloff in long-term taxable bonds. Yet, as the second chart below shows, taxable bond investors are not “running to the hills” like muni bond investors. So, the contention above that the media is causing muni woes is incorrect. Muni performance is in line with its taxable counterpart.
<Click on chart for larger image>
<Click on chart for larger image>
While muni performance may be in line with taxable bonds, the outflows seen in the muni market are a different story. We concluded the Newsclips post late last week with:
The bad news about munis started right after the mid-term elections. Those elections saw a historic turnover in governors’ mansions and state legislatures.
We understand that it is politically expedient for these legislators and governors to talk “fire and brimstone” about their budgets to force compromise. And in many cases their budgets do need major overhauls.
But they have to be careful. If they scare investors away now, and the muni mutual fund outflows suggest this might be happening, then their projections that they have several years to deal with their budget problems will be collapsed to the next several weeks. If investors stop buying your bonds, you’re insolvent.
While we don’t think this will be the case, it is unsettling that the majority owner of munis (retail) seems to be running away from this market because of bad press. State level politicians that think scaring these munis investors will help them get leverage in political negotiations are playing with fire. Once/If the movement to the exits becomes a sprint, it is hard to get it to reverse.