This week’s bankruptcy filing by Jefferson County, Ala., was as widely anticipated as the filing by MF Global at the end of October was sudden and shocking.
That’s just one reason why the nearly $3 trillion muni bond market will continue to fare reasonably well, defying prophecies of doom from pundits such as Meredith Whitney, and even outperforming other still-riskier asset classes. After all, in a world where developed nations teeter on the verge of default, bonds tied to necessary services issued by communities with reasonably solid tax bases begin to look even more attractive on a relative basis.
The Jefferson County situation is very nearly a unique situation: an extraordinary mix of graft and corruption surrounding a particular sewer bond issue has left the county’s finances in jeopardy for the last three years. JP Morgan Chase (JPM) paid $722 million to settle SEC charges that its bankers bribed county officials to win underwriting business – one bond market analyst later calculated that the fine was larger than the fee the bank earned from the transaction. Now the bank – which still owns more than $1 billion of the $3 billion in sewer-system securities issued – is on the hook for still larger losses.
So, don’t buy JP Morgan stock, and don’t move to Birmingham, Ala. Its austerity measures make Greece look relatively attractive; lines to obtain essential city services are so long that the city has had to install portable toilets for those waiting (not connected to that ultra-costly sewer system, it should be noted.) But don’t shun muni bonds. The Jefferson County nightmare was a case of everything that possibly could go wrong going wrong at precisely the same time. So says Patrick Early, chief municipal analyst at Wells Fargo Advisors, who urged investors in a client note yesterday not to hit the panic button.
The bankruptcy filing will generate headlines, but it’s not the kind of event that sparks fears of “contagion” within the muni bond market. Indeed, Early says that “municipal bankruptcy will be limited and defaults largely relegated to sectors outside of traditional general obligation and municipal essential service providers.”
So the muni market’s calm in the face of Jefferson County’s storm is that rare phenomenon: a moment of rationality on the part of the financial markets. Which also means that investors, while unlikely to see big bargains suddenly emerge, can at least take comfort that the yields they are pocketing – in the low single digits, for the most part – are safer than many other fixed-income investments, and often tax free to boot. That’s nothing to sneeze at in these days of global financial turmoil.
