Remember when municipal finance specialists, politicians, fixed-income fund managers, credit analysts, municipal finance columnists, municipal finance executives, bond analysts, business reporters, and sundry other "experts" pooh-poohed the warning Meredith Whitney's gave in December on CBS's "60 Minutes" about a coming meltdown in the muni market, with some suggesting the banking analyst was well out of her depth?
Well, I wonder what they are saying now that Jeff Gundlach, one of the most successful fixed-income investors of modern times, has voiced similar concerns about the outlook for what has been a very popular investment class:
"Jeffrey Gundlach: Munis Are The New Subprime" (CNBC.com)
Bond king Jeff Gundlach likened municipal bonds to subprime mortgage bonds on CNBC’s Strategy Session on Wednesday.
“You’ve got a history of low defaults, which is comforting. But that kind of sounds like what subprime sounded like back in 2006,” Gundlach said.
Gundlach said the markets for subprime bonds and municipal bonds are similar because the buyers are similar. Muni bond buyers aren’t seeking fundamentally good credit stories—they are buying for “technical reasons,” Gundlach said. This is exactly what happened with subprime
With subprime bonds, buyers were seeking highly-rated credit with very low default histories in order to satisfy regulatory bank capital requirements. They largely ignored deteriorating fundamentals, and continued to buy subprime mortgage-backed securities at a rapid clip even when the problems with the market were becoming apparent in the first half of 2007.
Muni bonds are bought for a different “technical reason”—the tax benefit—and buyers are once again ignoring deteriorating fundamentals. So are munis going the way of subprime?
“If by that you mean, lower, then yes. If you mean crashing, I’m agnostic on that,” he told David Faber.
Got that? Munis are headed lower. And he’s “agnostic” on whether or not they will crash. When one of the most important names in bond investing says he cannot tell whether or not an entire class of bonds will crash, there’s reason for investors to worry.
