As the safety of municipal bonds erodes, the market for these securities is evolving; from regulations to trading structure, this market will be forever changed.
Boston, October 27, 2010 – A new report from Aite Group examines issues in today’s U.S. municipal bond market. For long-time observers, some parts of this marketplace will appear stable; underneath the surface, however, this market will be forever changed, in particular for investors that can no longer rely on monoline insurers.
Historically, tax-exempt municipal debt has been viewed as a relatively safe investment. Today, as state and local governments struggle to meet budgets, city finance officers expect that their cities will be less able to meet financial obligations in 2011 than they have been in 2010. Indeed, this is a very challenging financing environment for state and local governments.
The municipal bond broker/dealer community is also feeling the effects of a changed municipal bond market landscape. From a transactions perspective, the hurdle of buyer responsibility has been pushed lower by self-regulatory organization-sponsored disclosure requirements. When coupled with the idiosyncratic factors underlying municipal debt, this task is daunting.
The news is equally dire for investors. Monoline insurers, once dominant guarantors in the municipal bond market, have become exceedingly scarce. This means that municipal bond investors can no longer rely on these guarantors to protect them against credit losses.
“Tax-exempt debt will likely be more valuable if the U.S. federal government raises income taxes to patch the federal budget shortfall,” says John Jay, senior analyst with Aite Group and author of this report. “In light of the other challenges in the municipal bond market, however, tax policy might be the least important value input for assessing municipal debt. After all, the after-tax return of a municipal issuer gone bust could be nearly worthless?something our fathers would not have had to worry about.”
This 16-page Impact Note contains six figures and one table. Clients of Aite Group's Institutional Securities & Investments and Wealth Management services can download the report.