About 18.9 million homes in the U.S. stood empty during the second quarter as surging foreclosures helped push ownership to the lowest level in a decade.
http://www.bloomberg.com/news/2010-07-27/vacancies-climb-as-u-s-home-ownership-falls-to-lowest-level-in-a-decade.html
The number of vacant properties, including foreclosures, residences for sale and vacation homes, rose from 18.6 million in the year-earlier quarter, the U.S. Census Bureau said in a report today. The ownership rate, meaning households that own their own residence, was 66.9 percent, the lowest since 1999.
Lenders are accelerating foreclosures as borrowers fall behind in mortgage payments after the worst housing crash since the Great Depression. A record 269,962 U.S. homes were seized in the second quarter, according to RealtyTrac Inc. Foreclosures probably will top 1 million this year, the Irvine, California- based data company said in a July 15 report
http://www.bloomberg.com/news/2010-07-27/vacancies-climb-as-u-s-home-ownership-falls-to-lowest-level-in-a-decade.html
Wednesday, July 28, 2010
Friday, July 23, 2010
The Tax Tsunami On The Horizon
The Tax Tsunami On The Horizon
Posted 07/21/2010 06:41 PM ET
http://www.investors.com/NewsAndAnalysis/Article/541131/201007211841/The-Tax-Tsunami-On-The-Horizon.aspx
Fiscal Policy: Many voters are looking forward to 2011, hoping a new Congress will put the country back on the right track. But unless something's done soon, the new year will also come with a raft of tax hikes — including a return of the death tax — that will be real killers.
Through the end of this year, the federal estate tax rate is zero — thanks to the package of broad-based tax cuts that President Bush pushed through to get the economy going earlier in the decade.
But as of midnight Dec. 31, the death tax returns — at a rate of 55% on estates of $1 million or more. The effect this will have on hospital life-support systems is already a matter of conjecture.
Resurrection of the death tax, however, isn't the only tax problem that will be ushered in Jan. 1. Many other cuts from the Bush administration are set to disappear and a new set of taxes will materialize. And it's not just the rich who will pay.
The lowest bracket for the personal income tax, for instance, moves up 50% — to 15% from 10%. The next lowest bracket — 25% — will rise to 28%, and the old 28% bracket will be 31%. At the higher end, the 33% bracket is pushed to 36% and the 35% bracket becomes 39.6%.
But the damage doesn't stop there.
The marriage penalty also makes a comeback, and the capital gains tax will jump 33% — to 20% from 15%. The tax on dividends will go all the way from 15% to 39.6% — a 164% increase.
Both the cap-gains and dividend taxes will go up further in 2013 as the health care reform adds a 3.8% Medicare levy for individuals making more than $200,000 a year and joint filers making more than $250,000. Other tax hikes include: halving the child tax credit to $500 from $1,000 and fixing the standard deduction for couples at the same level as it is for single filers.
Letting the Bush cuts expire will cost taxpayers $115 billion next year alone, according to the Congressional Budget Office, and $2.6 trillion through 2020.
But even more tax headaches lie ahead. This "second wave" of hikes, as Americans for Tax Reform puts it, are designed to pay for ObamaCare and include:
The Medicine Cabinet Tax. Americans, says ATR, "will no longer be able to use health savings account, flexible spending account, or health reimbursement pretax dollars to purchase nonprescription, over-the-counter medicines (except insulin)."
The HSA Withdrawal Tax Hike. "This provision of ObamaCare," according to ATR, "increases the additional tax on nonmedical early withdrawals from an HSA from 10% to 20%, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10%."
Brand Name Drug Tax. Makers and importers of brand-name drugs will be liable for a tax of $2.5 billion in 2011. The tax goes to $3 billion a year from 2012 to 2016, then $3.5 billion in 2017 and $4.2 billion in 2018. Beginning in 2019 it falls to $2.8 billion and stays there. And who pays the new drug tax? Patients, in the form of higher prices.
Economic Substance Doctrine. ATR reports that "The IRS is now empowered to disallow perfectly legal tax deductions and maneuvers merely because it judges that the deduction or action lacks 'economic substance.'"
A third and final (for now) wave, says ATR, consists of the alternative minimum tax's widening net, tax hikes on employers and the loss of deductions for tuition:
• The Tax Policy Center, no right-wing group, says that the failure to index the AMT will subject 28.5 million families to the tax when they file next year, up from 4 million this year.
• "Small businesses can normally expense (rather than slowly deduct, or 'depreciate') equipment purchases up to $250,000," says ATR. "This will be cut all the way down to $25,000. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be 'depreciated.'"
• According to ATR, there are "literally scores of tax hikes on business that will take place," plus the loss of some tax credits. The research and experimentation tax credit will be the biggest loss, "but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs."
• The deduction for tuition and fees will no longer be available and there will be limits placed on education tax credits. Teachers won't be able to deduct their classroom expenses and employer-provided educational aid will be restricted. Thousands of families will no longer be allowed to deduct student loan interest.
Then there's the tax on Americans who decline to buy health care insurance (the tax the administration initially said wasn't a tax but now argues in court that it is) plus a 3.8% Medicare tax beginning in 2013 on profits made in real estate transactions by wealthier Americans.
Not all Americans may fully realize what's in store come Jan. 1. But they should have a pretty good idea by the mid-term elections, and members of Congress might take note of our latest IBD/TIPP Poll (summarized above).
Fifty-one percent of respondents favored making the Bush cuts permanent vs. 28% who didn't. Republicans were more than 4 to 1 and Independents more than 2 to 1 in favor. Only Democrats were opposed, but only by 40%-38%.
The cuts also proved popular among all income groups — despite the Democrats' oft-heard assertion that Bush merely provided "tax breaks for the wealthy." Fact is, Bush cut taxes for everyone who paid them, and the cuts helped the nation recover from a recession and the worst stock-market crash since 1929.
Maybe, just maybe, Americans remember that — and will not forget come Nov. 2.
http://www.investors.com/NewsAndAnalysis/Article/541131/201007211841/The-Tax-Tsunami-On-The-Horizon.aspx
White House predicts budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends
White House predicts budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends
By ANDREW TAYLOR, Associated Press Writer Andrew Taylor, Associated Press Writer – Fri Jul 23, 3:12 pm ET
http://news.yahoo.com/s/ap/20100723/ap_on_bi_ge/us_budget_deficit_2
WASHINGTON – New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends.
That's actually a little better than the administration predicted in February.
The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates.
The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 — a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade.
The gaping deficits are of increasing concern to voters. But Obama and Democrats controlling Congress are mostly taking a pass on deficit reduction this year as they await possible recommendations from Obama's deficit commission.
While there's a slight improvement in the deficit for the current year, next year's predicted $1.42 trillion worth of red ink — that's 37 cents of borrowing for every dollar spent — is looking worse. It's about $150 billion more than previously predicted, because of still-slumping tax revenues.
White House budget director Peter Orszag said the numbers represent a "fiscal situation that requires attention."
Deficits have skyrocketed since the recession took hold in 2008 and Congress responded with a massive bailout of the financial system and last year's $862 billion stimulus measure.
Associated Press writer Jeannine Aversa contributed to this report.
http://news.yahoo.com/s/ap/20100723/ap_on_bi_ge/us_budget_deficit_2
By ANDREW TAYLOR, Associated Press Writer Andrew Taylor, Associated Press Writer – Fri Jul 23, 3:12 pm ET
http://news.yahoo.com/s/ap/20100723/ap_on_bi_ge/us_budget_deficit_2
WASHINGTON – New estimates from the White House on Friday predict the budget deficit will reach a record $1.47 trillion this year. The government is borrowing 41 cents of every dollar it spends.
That's actually a little better than the administration predicted in February.
The new estimates paint a grim unemployment picture as the economy experiences a relatively jobless recovery. The unemployment rate, presently averaging 9.5 percent, would average 9 percent next year under the new estimates.
The Office of Management and Budget report has ominous news for President Barack Obama should he seek re-election in 2012 — a still-high unemployment rate of 8.1 percent. That would be well above normal, which is closer to a rate of 5.5 percent to 6 percent. Private economists don't think the unemployment rate will drop to those levels until well into this decade.
The gaping deficits are of increasing concern to voters. But Obama and Democrats controlling Congress are mostly taking a pass on deficit reduction this year as they await possible recommendations from Obama's deficit commission.
While there's a slight improvement in the deficit for the current year, next year's predicted $1.42 trillion worth of red ink — that's 37 cents of borrowing for every dollar spent — is looking worse. It's about $150 billion more than previously predicted, because of still-slumping tax revenues.
White House budget director Peter Orszag said the numbers represent a "fiscal situation that requires attention."
Deficits have skyrocketed since the recession took hold in 2008 and Congress responded with a massive bailout of the financial system and last year's $862 billion stimulus measure.
Associated Press writer Jeannine Aversa contributed to this report.
http://news.yahoo.com/s/ap/20100723/ap_on_bi_ge/us_budget_deficit_2
Saturday, July 17, 2010
F. A. Hayek’s : Indeed, it was stimulus that caused the coordination failure
Hayek after 35 Years
April 26, 2010
by Jerry O’Driscoll
http://thinkmarkets.wordpress.com/2010/04/26/hayek-after-35-years/
Today I reread F. A. Hayek’s Nobel Lecture, “The Pretence of Knowledge.” Hayek was awarded the Nobel Memorial Prize in 1974 and delivered his lecture on December 11, 1974. I was amazed at how modern it was, and appropriate once again for the times.
The 1970s were terrible times: stop-go demand management policies had produced stagflation that would continue for the rest of the decade. Hayek said that “we have indeed at the moment little cause for pride: as a profession we have made a mess of things.” He charged that the mess had been produced by policies the majority of economists “recommended and even urged governments to pursue.”
The focus of his lecture was on scientism and how its errors had led economists and the Western economies to where they found themselves at that moment. What was the chief theoretical error? It was “the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level.” The “Pretence of Knowledge” was that economists had or could ever have the knowledge required to do that.
What was the correct theory of the cause of widespread unemployment? It is “the existence of discrepancies between the distribution of demand among the different goods and services and the allocation of labour and other resources among the production of those outputs.” We call such discrepancies a coordination failure.
The coordination failure cannot be resolved by stimulating demand because spending is always on particular goods and services. There is no aggregate out put on which to spend money. Aggregate demand and supply are categories of a model with no empirical counterparts.
Unless economists can solve the knowledge problem, they have no way of aligning spending with actual preferences. Stimulus policies are more likely to aggravate as alleviate the problem.
Indeed, it was stimulus that caused the coordination failure. Hayek outlined his theory succinctly in one paragraph.
Monetary injections into particular markets stimulate demand only temporarily.
Labor and other resources are drawn into the stimulated activities (think housing, 2002-07).
Once the monetary stimulus ceases or merely slows, the production and employment cannot be maintained.
Only if monetary stimulus or accelerated (once expectations come into play) can the new pattern of production and employment be maintained.
The consequence of monetary stimulus is “a distribution of employment which can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity.”
The lecture is worth reading by those who have not done so, and rereading by those who have.
http://thinkmarkets.wordpress.com/2010/04/26/hayek-after-35-years/
Wednesday, July 14, 2010
Failure Generation: Obama faces growing credibility crisis
By Edward Luce in Washington
http://www.ft.com/cms/s/0/434315b2-8ea6-11df-8a67-00144feab49a.html
Published: July 13 2010 18:51 | Last updated: July 13 2010 18:51
Robert Gibbs, Barack Obama’s chief spokesman, got into hot water this week for daring to speak the truth – that the Democrats could lose control of the House of Representatives in November. But it could be even worse than that.
Contrary to pretty much every projection until now, Democratic control of the Senate is also starting to coming into question. While Mr Obama’s approval ratings have continued to fall, and now hover at dangerously close to 40 per cent according an ABC-Washington Post poll published on Tuesday, the fate of his former colleagues in the Senate looks even worse.
EDITOR’S CHOICE
Opinion: ‘Hell no’ is not a platform for power - Jul-13In depth: The Obama presidency - May-23Obama attacked over business regulation - Jul-12Video: Donohue on business regulation - Jul-12Global Insight: US financial reform - Jul-12White House taps Lew for budget office - Jul-13In the past few days polls have shown Republican challengers taking the lead over previously safe Democratic incumbents, such as Barbara Boxer in California and Russ Feingold in Wisconsin. Indeed, given the uniformly negative direction in the numbers, it is now quite possible the Republicans could win the Senate seats formerly held by both President Obama in Illinois, and Joe Biden, vice-president, in Delaware.
Add to that the continuing woes of Harry Reid, the Senate Democratic majority leader, in Nevada, where the Republican party’s recent nomination of Sharron Angle, a far-right and highly eccentric Tea Party supporter, appear to have had no positive effect on Mr Reid’s prospects, and the Grand Old party has a good shot at taking control of both houses of Congress. Worse for Mr Obama, political scientists say that at this stage in the calendar, there is almost nothing he can do about it.
“If you ask me where the silver lining is for President Obama, I have to say I cannot see one,” says Bill Galston, a former Clinton official, who has been predicting for months the Democrats could lose the House. “Just as BP’s failure to cap the well has been so damaging, Obama’s failure to cap unemployment will be his undoing. There is nothing he can do to affect the jobless rate before November.”
see more :
http://www.ft.com/cms/s/0/434315b2-8ea6-11df-8a67-00144feab49a.html
Monday, July 05, 2010
WAYNE ALLYN ROOT: Barack Obama: The great jobs killer
WAYNE ALLYN ROOT: Barack Obama: The great jobs killer
As former President Ronald Reagan might have said, "Obama, there you go again."
The current occupant of the White House claims to know how to create jobs. He claims jobs have been created. But so far the score is Great Obama Depression 2.2 million lost jobs, Obama 0 -- a blowout.
Obama is as hopeless, helpless, clueless and bankrupt of good ideas as the manager of the Chicago Cubs in late September. This "community organizer" knows as much about private-sector jobs as Pamela Anderson knows about nuclear physics.
It's time to call Obama what he is: The Great Jobs Killer. With his massive spending and tax hikes -- rewarding big government and big unions, while punishing taxpayers and business owners -- Obama has killed jobs, he has killed motivation to create new jobs, he has killed the motivation to invest in new businesses, or expand old ones. With all this killing, Obama should be given the top spot on the FBI's Most Wanted List.
Meanwhile, he has kept the union workers of GM and Chrysler employed (with taxpayer money). He has made sure that most government employee union members got their annual raises for sleeping on the job (with taxpayer money). He made sure that his voters got handouts mislabeled as "tax cuts" even though they never paid taxes (with taxpayer money). And he made sure that major campaign contributors collected billions off government stimulus (with taxpayer money).
As far as the taxpayers -- the people who actually take risks with our own money to create small businesses and jobs and pay most of the taxes -- we require protection under the Endangered Species Act.
You won't find proof of the damage Obama is doing on Wall Street, but rather on Main Street. My friends are all part of the economic engine of America: Small business. Small business creates 75 percent of new jobs (and a majority of all jobs). I called one friend who was a wealthy restaurant owner. He says business is off by 60 percent. He's drowning in debt. He won't last much longer. His wealth is gone.
I called another friend in the business of home improvement. He says business is off 90 percent from two years ago. My contractor just filed personal bankruptcy. She won't be building any more homes. The hair salon where I've had my hair cut for years closed earlier this year. Bankrupt. But here's the clincher -- ESPN Zone just closed all their restaurants across the country. If they can't make it selling cheap food and overpriced beer with 100 big screens blaring every sporting event on the planet to a sports-crazed society, we are all in deep, deep trouble.
I've polled all my friends who own small businesses -- many of them in the Internet and high-tech fields. They all agree that in this new Obama world of high business taxes, income taxes, payroll taxes, capital gains taxes, and workers compensation taxes, the key to success is to avoid employees. The only way to survive as a business owner today is by keeping the payroll very low and by hiring only independent contractors or part-time employees provided by temp agencies.
The days of jobs in the private sector with big salaries, full benefits, and pensions are over. We've all seen where those kinds of jobs get you as a business owner -- in Bankruptcy Court or surviving on government welfare like GM and Chrysler. Or in the case of government itself -- completely insolvent, but surviving by ripping off taxpayers and fraudulently running printing presses at the Fed all day and night to print money by the trillions.
Unfortunately, small businesses don't have the power to impose taxes or print money. So unlike government, we'll just have to cut employees and run lean and mean.
It has now become clear that, outside of the burgeoning field of Census takers, there will be no major increase in new jobs for years to come. Outside government, Obama has created a wasteland of economic ruin and depression that looks much like the landscape of Mel Gibson's first movie "Mad Max." Without a printing press in Obama's world, you're just plain out of luck.
The days of believing the Obama propaganda about a jobs recovery are over. The trillion-dollar corporate handouts (neatly named "stimulus") may have kept big business in the money for the past 18 months, and artificially propped up the stock market, but small business is the real canary in the coal mine.
My small business-owning friends aren't creating one job. Not one. They are shedding jobs. They are learning to do more with fewer employees. They are creating high-tech businesses that don't need employees. And many business owners are making plans to leave the country. In a high-tech world where businesses can be run from anywhere, Obama has a problem. His one-trick pony -- raise taxes, raise taxes, raising taxes -- is chasing away the business owners he desperately needs to pay his bills.
So who is going to pay Obama's taxes? Not his voters. They want government to pay them. Who is going to create Obama's jobs? Not his voters -- they've never created a job in their lives.
So what is Obama going to do? Maybe he can get Pamela Anderson on the line.
Wayne Allyn Root, a former vice presidential nominee for the Libertarian Party, writes from Henderson. His column appears every other week.
Find this article at:
http://www.lvrj.com/opinion/barack-obama--the-great-jobs-killer-97758294.html
As former President Ronald Reagan might have said, "Obama, there you go again."
The current occupant of the White House claims to know how to create jobs. He claims jobs have been created. But so far the score is Great Obama Depression 2.2 million lost jobs, Obama 0 -- a blowout.
Obama is as hopeless, helpless, clueless and bankrupt of good ideas as the manager of the Chicago Cubs in late September. This "community organizer" knows as much about private-sector jobs as Pamela Anderson knows about nuclear physics.
It's time to call Obama what he is: The Great Jobs Killer. With his massive spending and tax hikes -- rewarding big government and big unions, while punishing taxpayers and business owners -- Obama has killed jobs, he has killed motivation to create new jobs, he has killed the motivation to invest in new businesses, or expand old ones. With all this killing, Obama should be given the top spot on the FBI's Most Wanted List.
Meanwhile, he has kept the union workers of GM and Chrysler employed (with taxpayer money). He has made sure that most government employee union members got their annual raises for sleeping on the job (with taxpayer money). He made sure that his voters got handouts mislabeled as "tax cuts" even though they never paid taxes (with taxpayer money). And he made sure that major campaign contributors collected billions off government stimulus (with taxpayer money).
As far as the taxpayers -- the people who actually take risks with our own money to create small businesses and jobs and pay most of the taxes -- we require protection under the Endangered Species Act.
You won't find proof of the damage Obama is doing on Wall Street, but rather on Main Street. My friends are all part of the economic engine of America: Small business. Small business creates 75 percent of new jobs (and a majority of all jobs). I called one friend who was a wealthy restaurant owner. He says business is off by 60 percent. He's drowning in debt. He won't last much longer. His wealth is gone.
I called another friend in the business of home improvement. He says business is off 90 percent from two years ago. My contractor just filed personal bankruptcy. She won't be building any more homes. The hair salon where I've had my hair cut for years closed earlier this year. Bankrupt. But here's the clincher -- ESPN Zone just closed all their restaurants across the country. If they can't make it selling cheap food and overpriced beer with 100 big screens blaring every sporting event on the planet to a sports-crazed society, we are all in deep, deep trouble.
I've polled all my friends who own small businesses -- many of them in the Internet and high-tech fields. They all agree that in this new Obama world of high business taxes, income taxes, payroll taxes, capital gains taxes, and workers compensation taxes, the key to success is to avoid employees. The only way to survive as a business owner today is by keeping the payroll very low and by hiring only independent contractors or part-time employees provided by temp agencies.
The days of jobs in the private sector with big salaries, full benefits, and pensions are over. We've all seen where those kinds of jobs get you as a business owner -- in Bankruptcy Court or surviving on government welfare like GM and Chrysler. Or in the case of government itself -- completely insolvent, but surviving by ripping off taxpayers and fraudulently running printing presses at the Fed all day and night to print money by the trillions.
Unfortunately, small businesses don't have the power to impose taxes or print money. So unlike government, we'll just have to cut employees and run lean and mean.
It has now become clear that, outside of the burgeoning field of Census takers, there will be no major increase in new jobs for years to come. Outside government, Obama has created a wasteland of economic ruin and depression that looks much like the landscape of Mel Gibson's first movie "Mad Max." Without a printing press in Obama's world, you're just plain out of luck.
The days of believing the Obama propaganda about a jobs recovery are over. The trillion-dollar corporate handouts (neatly named "stimulus") may have kept big business in the money for the past 18 months, and artificially propped up the stock market, but small business is the real canary in the coal mine.
My small business-owning friends aren't creating one job. Not one. They are shedding jobs. They are learning to do more with fewer employees. They are creating high-tech businesses that don't need employees. And many business owners are making plans to leave the country. In a high-tech world where businesses can be run from anywhere, Obama has a problem. His one-trick pony -- raise taxes, raise taxes, raising taxes -- is chasing away the business owners he desperately needs to pay his bills.
So who is going to pay Obama's taxes? Not his voters. They want government to pay them. Who is going to create Obama's jobs? Not his voters -- they've never created a job in their lives.
So what is Obama going to do? Maybe he can get Pamela Anderson on the line.
Wayne Allyn Root, a former vice presidential nominee for the Libertarian Party, writes from Henderson. His column appears every other week.
Find this article at:
http://www.lvrj.com/opinion/barack-obama--the-great-jobs-killer-97758294.html
Investors fear rising risk of US regional defaults
Investors fear rising risk of US regional defaults
By Nicole Bullock in New York
http://www.ft.com/cms/s/0/fb933f08-885b-11df-aade-00144feabdc0.html
Published: July 5 2010 19:30 | Last updated: July 5 2010 20:21
Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some eurozone countries.
The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans.
Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the eurozone could now infect the US.
“The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities, who singled out parts of California, as well as towns and cities in Illinois, Michigan and New York state as among the most vulnerable.
“You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market.”
If these market swings are sustained, they could push up borrowing costs for local governments, which, in turn, could exacerbate the squeeze on local authority finances and place more stress on the federal budget.
“There is more of a perceived risk to munis now,” said Laura LaRosa, director of fixed-income at Glenmede, a private investment manager.
US states faced budget deficits of $89bn for fiscal 2011, which began for most of them on July 1, according to the National Conference of State Legislatures. That is after shortfalls of more than $300bn since 2008.
Local municipalities can default and, depending on the state, file for bankruptcy. Should a state come to the brink, which is not expected at this time, many believe that it would be likely to receive federal support. The sharpest swings in the muni market have been seen in the $100bn so-called “Build America bonds” – or Babs – a type of US muni debt that has characteristics similar to corporate bonds. This sector has attracted a fresh investor base, which is now demanding greater compensation for risk.
Risk premiums, or spreads on Babs relative to Treasuries, have risen to 228 basis points, according to an index from Barclays Capital. The spreads have climbed from a low of 161bp in early May to their highest level since Barclays started compiling the index last October.
Absolute yields have risen to 6.03 per cent from 5.97 per cent.“The problems in the eurozone have driven up fixed-income yields overseas – on banks, utilities and sovereigns,” said Matt Fabian, a managing director at Municipal Market Advisors. “Babs compete directly against those issuers for buyers.”
The cost of insuring against default for munis also has risen. However, this part of the derivatives market is rather illiquid, and the mainstream part of the muni market has not seen as dramatic a swing as the Babs sector, partly because this is dominated by a traditional base of investors. These include local buyers who receive tax breaks when they buy US muni bonds, and who have historically been relatively loyal.
The muni sector has been known for its relatively few defaults and debt service is high in the pecking order of bills that states must pay. However, the threat of default has come to the fore as some states struggled to balance budgets after years of lower revenue and as federal stimulus is tapering off.
http://www.ft.com/cms/s/0/fb933f08-885b-11df-aade-00144feabdc0.html
By Nicole Bullock in New York
http://www.ft.com/cms/s/0/fb933f08-885b-11df-aade-00144feabdc0.html
Published: July 5 2010 19:30 | Last updated: July 5 2010 20:21
Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some eurozone countries.
The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans.
Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the eurozone could now infect the US.
“The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities, who singled out parts of California, as well as towns and cities in Illinois, Michigan and New York state as among the most vulnerable.
“You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market.”
If these market swings are sustained, they could push up borrowing costs for local governments, which, in turn, could exacerbate the squeeze on local authority finances and place more stress on the federal budget.
“There is more of a perceived risk to munis now,” said Laura LaRosa, director of fixed-income at Glenmede, a private investment manager.
US states faced budget deficits of $89bn for fiscal 2011, which began for most of them on July 1, according to the National Conference of State Legislatures. That is after shortfalls of more than $300bn since 2008.
Local municipalities can default and, depending on the state, file for bankruptcy. Should a state come to the brink, which is not expected at this time, many believe that it would be likely to receive federal support. The sharpest swings in the muni market have been seen in the $100bn so-called “Build America bonds” – or Babs – a type of US muni debt that has characteristics similar to corporate bonds. This sector has attracted a fresh investor base, which is now demanding greater compensation for risk.
Risk premiums, or spreads on Babs relative to Treasuries, have risen to 228 basis points, according to an index from Barclays Capital. The spreads have climbed from a low of 161bp in early May to their highest level since Barclays started compiling the index last October.
Absolute yields have risen to 6.03 per cent from 5.97 per cent.“The problems in the eurozone have driven up fixed-income yields overseas – on banks, utilities and sovereigns,” said Matt Fabian, a managing director at Municipal Market Advisors. “Babs compete directly against those issuers for buyers.”
The cost of insuring against default for munis also has risen. However, this part of the derivatives market is rather illiquid, and the mainstream part of the muni market has not seen as dramatic a swing as the Babs sector, partly because this is dominated by a traditional base of investors. These include local buyers who receive tax breaks when they buy US muni bonds, and who have historically been relatively loyal.
The muni sector has been known for its relatively few defaults and debt service is high in the pecking order of bills that states must pay. However, the threat of default has come to the fore as some states struggled to balance budgets after years of lower revenue and as federal stimulus is tapering off.
http://www.ft.com/cms/s/0/fb933f08-885b-11df-aade-00144feabdc0.html
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