Interesting commentary on the rise of interest rates and municipal bonds. From the President of First Miami:
Have you heard the clucking?
It’s the sound of Chicken Little returning to the municipal bond market.
In 2008, he paid a visit during the mortgage crisis. At the time, bond insurers were downgraded when they strayed from their traditional market and ventured into exotic – and toxic – financial products, while major banks, brokerages and hedge funds, which traditionally provided support to the muni market, became net sellers to enhance their own liquidity during the tumult.
Munis themselves were fine, but the chickens clucked, bond prices slumped and too many average investors panicked and sold. Veteran bond investors, meantime, did what they always do: take advantage of the disruptions and feast on fatter yields.
Two years later, Chicken Little reappeared, this time in the guise of a banking analyst whose comments on state and local finances during a TV interview spooked investors and spurred a muni selloff. Nevermind that her warnings of Armageddon were wildly off the mark; many took heed and, as a result, blew a hole in their portfolios.
Today, Chicken Little has returned, with the same, equity-oriented pundits warning of a calamitous interest-rate spike and urging investors to shed their bonds.
Which bonds are they referring to? We’re not sure, and due to their lack of expertise in bonds, they’re probably not either. We only hear about Treasury bonds, but we don’t know of a single individual investor who owns any.
Read the whole thing.