The municipal bond market remains just a thread away from total free fall.
The price of the iShares S&P National AMT-Free bond fund was trading at $101.28 this afternoon, down 1.6% from Friday and down 3.7% from a week ago.
When things get focused on California, the declines are much more severe.
The Pimco California Municipal Income Fund was trading at $12.04 a share, down 5.6% for the day and down 13.4% from a week ago.
States and municipalities with dubious credit standings are flooding the market with new issues. California, alone, is coming with $14 billion in debt in the next two weeks. Over time, things will only get worse, a non-partisan California audit committee projects that California's deficit over the next year and a half will climb by more than $25 billion.
It is not a stretch to view Ben Bernanke's QE2 as an attempt to head off financial panic at the state, local and federal levels because of the debt problem that could go into panic mode at any time. In other words, Bernanke is choosing inflation to partially bailout the bondholders, while wage earners, pensioners and others on fixed income get totally screwed by the price inflation it will cause.
Bottom line: The TSA is going to grab you from the front and the Fed is going to get you from behind.
It is not a stretch to view Ben Bernanke's QE2 as an attempt to head off financial panic at the state, local and federal levels because of the debt problem that could go into panic mode at any time. In other words, Bernanke is choosing inflation to partially bailout the bondholders, while wage earners, pensioners and others on fixed income get totally screwed.
ReplyDeleteStill don't get this as we can see that the creation of new money is resulting in yields screaming higher which is directly precipitating the current crisis. But I will await with eyes open to see how, contrary to apparent logic, Bernanke's assistance will be able to overcome climbing yields to be effectual on this front.
@Taylor Conant
ReplyDeleteThe choice for the bond holders is to get an inflation reduced pay back on their money, or to take the bonds through bankruptcy court.
Ethics aside, if you are a bondholder which would you choose?
Wenzel,
ReplyDeleteI am not sure I understand your response. It appears many bondholders are choosing a third path-- dump the bonds to another sucker. Additionally, potential bondholders could be considered to be slowly evaporating. The result could be the total inability of the state governments to float their debt at any interest rate.
As for me, I'd choose the third way, also, and dump my debt. Take the cash, put it in gold.
For every bond seller who is taking your "third path", there is a buyer, who is betting on the gvt/Fed. Bernanke is concerned about that final bond holder.
ReplyDeleteHe also fears evaporating bond buyers that's why he wants full pay out at maturity.He's not as much concerned with traders in the middle.