Here is a graph of the MUB Municipal bond index. It isn't pretty. You can practically hear the liquidity seeping out of the system. The current environment is difficult and will be getting more so. My own prediction is that we face a few municipal defaults over the next 18 months. This is going to widen spreads on muni to levels we haven't seen in decades. Take an umbrella out there folks it is raining muni's. Here are the Debt domino's that have already fallen. The ABX. Note this is AAA paper going for below $.65 on the dollar.
And here is the Commercial Mortgage backed paper, which has started its fall. Please note that the index for Commercial Mortgages (CMBX) is quoted as a spread over Libor. When it goes up it means more risk. I thought commercial mortgages were in trouble, but the rate of speed has taken me by surprise. The CMBX gets critiqued as a bad proxy for Commercial mortgages, but it is still directionally interesting.
If one looks at the A rated CMBX paper it starts looking like commercial real estate is getting funded with credit cards. The debt markets are seizing up as the banks can't securitize (package and sell loans) becuase few are interested in buying them. This means banks have to sit and hold the loans, which takes away from their lending ability for more assets. Banks got used to holding loans for 60-90 days and selling them. They now find themselves holding loans. As one hedge fund manager put it well, we are back to the Era of Jimmy Stewart banking, where the bank actually hold and manages the risk. This may not be such a bad thing, but the change to that slower era, is going to pretty gut wrenching as all of the "value" created by quick and dirty securitization disappears.
One might wish to own federally garunteed notes or bonds for the next 6-12 months. One might also suggest a portfolio of Suisse government bonds. The euro has it own mortgage issues looming in the UK and parts of Eastern Europe. An interesting anecdote. 50% of Hungarian mortgages are taken out in Swiss Francs, becuase the rates were cheaper than Forints. The Poles did the same thing. The Hungarian govt. is now going to start letting the Forint float against the Euro. The Forint will start losing ground fast and those mortgages
will get difficult. The Euro area will be challenged.
Here is a good snapshot of the Hungarian economy.
