Wednesday, February 11, 2009

boring and local news... or not. Back to bond insurance

In Canonsburg there is a snippet hidden in a boring local story on their latest city council meeting ... but note where it is reported that a proposed bond restructuring was an error and should not be considered. Note the little comment in there on insurance (bond insurance I presume) impacting the ability for the borough to refinance and save some money. It's a telling story since I am guessing the bond dude thought there was a refi option based on changes in interest rates, but didn't think to note of the changing environment in the municipal bond insurance world. Remember when the city briefly had a major refi deal delayed because of escalating bond insurance costs. What happens when these interest rates go back up to normal levels, and I presume municipal bond insurance rates stay high as well. The only reason the muni bond insurance story is under the radar is because it has been subsumed by the changes in the yield curve itself.

Boring? For sure. Just a local story. Not a chance. Even with government bond rates at their lowest ever, you are seeing lots of municipalities unable to refinance and save money. Makes you wonder what may happen when interest rates return to more normal levels..... like when the recession ends. Yes it will end. But here is the big big story connected to that. From overnight read the article in Bond Buyer: Treasury Rejects Aid to Insurers.. Again, that is referring to bond insurers. Big implications down the road if the bond insurance industry completes it's implosion.

This old oped could use updating for sure, but since we are again on the cusp of a mayoral race again (or not?)... in 2006 I wrote: Candidates, be careful what you wish for. I bring that up because of one para in there I put in on the implications of bond insurance across the state. So yeah, it's all connected.

Finally just to complete the thought. The biggest public finance news these days that is not being talked much is all about how low interest rates are.... Government bond rates are at some historically low levels. That means the same for the savings accounts of most municipalities as it does for you when it comes to the interest rates you can get. Most municipalities collect a lot of their tax revenue up front in a given year when tax bills are typically sent out. That money is spent over the course of the year, but before it is spent it is typically put in some short term t-bills that historically has produced small, but palpable, returns. When you are talking about most of the budget of a municipality early in the year, it's not a small amount. But guess what? Low interest rates means those short term rates have all but dried up completely... virtually zero. I bet most municipalities out there have budgeted real $$ from this revenue source.. money that just isn't going to be there this coming year and be causing more unanticipated shortfalls all around.


Anonymous Anonymous said...

Even with government bond rates at their lowest ever, you are seeing lots of municipalities unable to refinance and save money.

Low treasury rates = negative arbitrage

Wednesday, February 11, 2009 9:44:00 AM  
Blogger C. Briem said...

Hey, negative arbitrage is SOP around here. Go look up the history of Pittsburgh's Pension Obligation bonds.

Wednesday, February 11, 2009 11:10:00 AM  

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