Friday, August 23, 2013

Analysts: Muni-Bond Selloff Looks Like Lehman All Over Again

Between May 1 and July 24 of this year, the AAA scale has risen 1.14 percentage points to 2.80% from 1.66%. In the aftermath of the Lehman Brothers bankruptcy filing in 2008, the same scale shot up to 4.86% on Oct. 15 of that year from 3.46% on Sept. 11, a gain of 1.40 percentage points, reports MarketWatch.

 Here's what Tom Kozlik and Alan Schankel, municipal credit analysts at Janney Capital Markets have to say about the similarities:
The near term movement of the market will potentially, like those in 2008 did, test the courage and perseverance of even the most patient investors. In fact, this market movement has already begun. During the middle of 2013 – from May 1 through June 24th – municipal benchmark yields experienced a ‘Lehman-like’ move when they rocketed up 114 basis points, the fastest increase since the 2008 Lehman Brothers bankruptcy filing.

It's wrong to just take to periods and look at empirical data to forecast out. You need theory to explain the moves and any similarities. The similarities come about based on Austrian Business Cycle Theory, which says a slowdown in money printing results in a shrinking in the capital structure of the economy. As a result there is upward pressure on interest rates, as those seeking funds must bid up rates to entice investors.

It such a slowdown in money growth occurring? It sure is. Just like it did in 1929, 1987 and 2008.

1 comment:

  1. Interesting...are there any examples when money supply rapidly shrank and there was not economic volatility??