You know I’ve been doing a lot of thinking and reading on the municipal bond situation happening across the country and it’s not a pretty picture. Which leads me to believe that shorting municipal bond ETFs (or continuing to do so) would be very profitable over the next 2-3 years. Some of the best analysts say that this lingering problem could be more extreme and far-reaching than the current housing mess that started this whole thing.
Here are some resources and tid-bits to consider…
State Credit Default Swaps (CDS) are EXTREMELY high
First I’m sure you’re asking, What the heck is a CDS Kirk?
A credit default swap (CDS) is a swap contract and agreement in which the protection buyer of the CDS makes a series of payments (often referred to as the CDS “fee” or “spread”) to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event.
In english they are “insurance contracts” that allow investors to protect their bond investments should the state default completely. The “annual premium” as you might call it is the “spread” you would pay up front to protect from disaster. Naturally the higher the spread or premium the higher the likelihood of trouble.
Here are some of the current CDS Spreads from some of the States in trouble:
- California – 301.4 bps
- Illinois – 233.6 bps
- New York -224.2 bps
- New Jersey – 222.2 bps
- Michigan – 211.3 bps
These are incredibly high and suggest that defaults could start to happen next year and ripple through the states! Read the full source from the Business Insider.
Debt Per Capita Levels are Unsustainable
Here’s an interesting interactive map you can find on Forbes.com. The debt per capita levels and unfunded pension liabilities are astounding. Moreover, declining tax revenues are hurting the ability to handle that debt payments.
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