Explaining Southern California's economy

Bond markets haven't signaled a California municipal meltdown

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Compton may become the next California city to declare bankruptcy. But the municipal bind market isn't panicking.

One of the things that's struck me about the two most recent bankruptcies — or almost-bankruptcies — in California, San Bernardino and now Compton, is that the bond markets aren't predicting a crisis. Reuters MuniLand columnist Cate Long has been following all the recent action in California's troubled cities and correlating it with what's going on in the $3.7-trillion municipal bond markets and she sees...no cascade of impending Chapter 9s:

American cities and states are enduring a lot of fiscal stress, and in some cases their municipal bonds are showing stress too. But overall the muni bond market feels comfortable with the debt of U.S. states and cities. The data does not suggest a broad meltdown.

In that context, she cites Guy Davidson of AllianceBernstein, a firm that according to Long has $3.3 billion in California muni exposure (and $31 billion under management in total) and that therefore might want to argue against a panic in MuniLand. This is from Davidson's blog post:

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San Bernardino bankruptcy caught the bond market by surprise

Berdoo Bankrupt

Steven Cuevas / KPCC

San Bernardino city council voted to prepare a bankruptcy late Tuesday. The bind market was completely shocked.

You'd think a $3.7-trillion municipal bond market would watch over the cities that issue debt like a hawk. But of course, that can be tough when you're talking about something that big. And although ratings agencies like Moody's and S&P monitor the finances and prospects of default for thousands of cities, they don't always have a clue what's going on inside city hall.

Shocking as it may sound, right up until it voted to move toward a Chapter 9 declaration earlier this week, San Bernardino's bonds were rated "investment grade" — meaning that institutional investors and big mutual funds could buy them. Some of the city's bonds have been downgraded to "junk" status now, reports Reuters. But from the perspective of the bond market, San Bernardino didn't look like a city facing a fiscal crisis with effectively no money in the bank, the inability to meet its payroll, and a possible scandal brewing over whether the city has accurately represented its finances to the outside world.

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